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Why Micron Technology, Inc. (MU) Stock Will Gain 21%

Just because the markets are ignoring MU stock doesn't mean you should

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The downgrade of Micron Technology, Inc. (NASDAQ:MU) by Goldman Sachs is not looking very good now. It’s an unusual call, considering MU stock trades at a steeply discounted forward price-earnings ratio of 5.6. Not to mention Micron’s profit margins have surged due to a NAND shortage and the industry is showing no signs of the limited supplying moderating.

Why Micron Technology, Inc. (MU) Stock Will Gain 21%
Source: Shutterstock

And as newer and faster computer parts from Advanced Micro Devices, Inc. (NASDAQ:AMD) and Intel Corporation (NASDAQ:INTC) come to market, demand for DDR4 will go up with it.

In the storage space, solid state drive demand will increase as consumers and businesses opt for its inclusion over mechanical hard disks. AI appliances also need fast storage and plenty of memory.

The increased demand, I believe, is enough to push Micron to $35 per share, roughly a 21% increase from today’s perch.

Micron’s Strong Quarterly Results

In the second quarter, Micron reported revenue soaring 58.7% year-over-year to $4.65 billion. Gross margin stood at a healthy 38.5%, almost doubling last year’s level of 20.4%. For the current (third) quarter, the company forecast revenue of $5.2 billion to $5.6 billion, easily surpassing the consensus estimate of $4.7 billion.

The company’s cost-cutting measures are adding to results. MU’s transition in manufacturing at the 20nm DRAM capability is benefiting the company, as the market’s favorable conditions are helping selling prices for DRAM. Prices rose 21% from the last quarter and will likely continue. For what it’s worth, no memory supplier has plans to lift output high enough to put a lid on prices.

Development of 3D XPoint

Looking ahead, Micron’s developments in 3D XPoint will solidify the company’s moat in memory technology. Neither Hynix nor Samsung Electronics (OTCMKTS:SSNLF) have an answer to Xpoint.

When it is released, expect profit margins getting a strong lift. Xpoint is not the only new market for the company. IoT markets are getting bigger and Micron’s components are at the center of it.

Valuations

Since Micron has clear profit growth ahead, assume annual revenue growth of between 10% to 15% for the next five years:

Fiscal Years Ending 16-Aug 17-Aug 18-Aug 19-Aug 20-Aug 21-Aug
Revenue 12,399 14,259 15,685 17,253 18,979 19,927
% Growth -23.40% 15.00% 10.00% 10.00% 10.00% 5.00%
Ebitda 3,274 4,705 3,137 4,313 5,694 5,978
% of Revenue 26.40% 33.00% 20.00% 25.00% 30.00% 30.00%

Source: finbox.io (click here to input your own assumptions)

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