3 Reasons Micron Technology, Inc. (MU) Is Still a Buy

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MU - 3 Reasons Micron Technology, Inc. (MU) Is Still a Buy

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It’s been a stellar year for Micron Technology, Inc. (NASDAQ:MU). Consider that the shares have outperformed big-time tech names like Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB). In all, MU stock has logged a blistering gain of 47% to $32.15. Not bad for a company that is in a commodity business and has been around since the 1970s.

3 Reasons Micron Technology, Inc. (MU) Is Still a Buy

Yet there are reasons to be concerned. The memory chip category is highly cyclical. Keep in mind that — back in 2012 — MU stock was fetching a lowly $6 per share.

In fact, some analysts have recently published not-so-optimistic reports on the shares. Back in early May, Goldman Sachs’ Mark Delaney downgraded MU stock from “buy” to “neutral” and lowered the price target from $32 to $30.

Now while all this is a bit discomforting — especially since there has already been a run up — I still think the bull case for the company is still in tact. So let’s take a look at three key factors:

MU Stock Factor #1: Positive Industry Fundamentals

DRAM prices have certainly been going in the right direction for MU Stock. During Q1, there was a sequential increase of 5% — and then a 21% jump in the following quarter. This has resulted in a nice increase in gross margins, which have gone from 18% in Q4 to 38.5% in Q2.

But of course, nothing lasts forever. And this is especially the case with the volatile chip sector. But according to Micron’s own guidance, it looks like the momentum is not showing any immediate signs of flagging. For example, the outlook for gross margins for Q3 is 44%-48%.

Interestingly, Morgan Stanley’s Joseph Moore recently backed this up with his own analysis, indicating that the demand for DRAM and NAND chips remain strong. There are also signs that supply shortages will remain. Because of this, his bull-case price forecast is for $42 per share.

MU Stock Factor #2: Restructuring

For the past few years, Micron has undergone wrenching changes. Part of this has been with belt-tightening, such as with layoffs and moves to realize efficiencies across the organization. But the company has also been skillful with acquisitions, such as for Inotera Memories, Tidal Systems, Convey Computer and Elpida Memory.

All this has not only made it possible to pump up margins but also to diversify the revenue base. Note that Micron is much less dependent on PC sales, which have languished for some time.

So during Q2, DRAM PC sales came to only about 16% of revenue. Actually, Micron now has strong positions in fast-growing markets like mobile, servers and even autos.

It’s also important to note that the company is putting lots of pressure on its major rivals like Samsung Electronics (OTCMKTS:SSNLF), Toshiba (OTCMKTS:TOSBF) and Western Digital Corp (NASDAQ:WDC). According to InvestorPlace.com’s Richard Saintvilus: “How do I know MU is taking market share? The fact that 60% to 65% of Micron’s revenue comes from its DRAM chip business and the company just grew second-quarter revenue by almost 60%, it’s putting up these numbers at the expense of some of its peers.”

MU Stock Factor #3: Valuation

When compared to other semiconductor stocks, Micron remains fairly cheap. After all, the multiple is at a rock-bottom 6 times FY consensus estimates. By comparison, , Intel Corporation (NASDAQ:INTC) is at 12X and Texas Instruments Incorporated (NASDAQ:TXN) is trading at 20X.

In other words, there is much more room for multiple expansion on MU stock. Oh, and and there should be lots of earnings power as the gross margins continue to expand. All in all, it’s a pretty good place for Micron to be right now.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/3-reasons-micron-technology-inc-mu-is-still-a-buy/.

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