Barron’s Isn’t Giving Micron Technology, Inc. (MU) Stock Enough Credit

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Thanks to continuing healthy demand for memory chips, including upcoming fall launches of new smartphones, shares of Micron Technology, Inc. (NASDAQ:MU) have been on a tear, surging some 34% this year and skyrocketing 113% in twelve months.

Barron’s Has an Opinion on Micron Technology, Inc. (MU) Stock…Ignore It

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Risks With MU Stock

Save for Nvidia Corporation (NASDAQ:NVDA), you would be hard-pressed to find a semiconductor stock hotter than Micron, which since February 21 has risen more than 26% from $23.77 to today’s price of nearly $30 per share (not to mention a brief stint at a new 52-week high of $32.96).

But, it’s time for profit-taking in MU stock, according to Barron’s. Citing Brian Matas, an analyst covering memory for IC Insights, Barron’s noted that the company can soon be hurt by new memory chip capacity, therefore reversing the boon that Micron has enjoyed.

Aside from improved pricing in the DRAM and NAND memory chip market, Micron has benefited from improving profit margins, helping it beat Wall Street’s bottom-line forecasts eight straight quarters. But, it won’t last, Barron’s noted. “A popular notion of the bull camp is that with the market consolidating to just a handful of producers, everyone is comfortable keeping supply low and raking in profit. So far, that’s been true.”

However, the article insists that the industry has been artificially keeping demand low to boost prices. “What happens next is either an announcement of new capacity, and therefore supply, or a cooling of demand,” the article notes. “It would be wrong to presume Samsung Electronic (OTCMKTS:SSNLF) won’t be aggressive in adding capacity. It will happen soon enough, I gotta believe it will.”

Where Micron Is Heading

While the risk of increased capacity does exist, Micron’s strong third-quarter earnings beat was driven by a solid gross margin of 48%, which came at the high end of management’s 44%-48% guidance range. Notably, the margin was almost 10 percentage points higher sequentially and 30 percentage points higher year over year.

Here’s the thing: management also issued fourth-quarter gross margin guidance of 47%-51%, which implies expansion of 100 basis-point sequential gains at the midpoint.

Given the fact that DRAM, which accounts for 64% of Micron’s revenue and about 70% of its gross profit, is generating higher average selling prices, it would be a mistake to part with MU stock now. What’s more, CEO Sanjay Mehrotra cited the fall launch of new smartphones as one of several catalysts in the company’s bullish outlook.

“We expect increased demand ahead of anticipated flagship smartphone introductions planned for the fall,” Mehrotra told analysts Thursday on the Q3 conference call.

These phones include Apple Inc.’s (NASDAQ:AAPL) tenth-anniversary iPhone, which some analysts suggest will include not only multiple cameras and augmented-reality applications, it will also sport higher-resolution displays — features that will require enhanced memory-chip densities, thus boosting demand for Micron chips.

Bottom Line for MU Stock

During the difficult times, Mehrotra figured out ways to make the best out what was once a bad situation where DRAM and NAND chips, those found in portable devices like tablets and MP3 players, had become commoditized. But, as the market has taken a turn for the better, Micron bears are seemingly competing to be the first to call the top.

This is even though Micron continues to take market share from competitors such as Toshiba Corp NPV (OTCMKTS:TOSBF) and Western Digital Corp (NASDAQ:WDC).

Meanwhile, the Barron’s article conveniently ignores data from a Semiconductor Industry Association (SIA) report, which shows a 22.6% surge in worldwide chip sales, reaching $32 billion — the industry’s strongest rate of growth on a year-over-year basis in seven years. Plus, SIA noted that, in particular, memory chip sales remain the industry’s fastest-growing segment, suggesting that Micron could have tons of runway left for growth.

With analysts estimates still rising, MU stock — despite its strong year-to-date gains — is even more attractive today than it was a year ago. Micron stock shares are priced at just five times fiscal 2018 earnings estimates of $6.02 per share, which is a fraction of the forward P/E of almost 30 it traded for a year ago.

From my vantage point, this make MU stock an obvious choice for investors looking for a stock that can outperform the market in the next 12-18 months.

As of this writing, Richard Saintvilus was long Micron shares.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/barrons-has-an-opinion-on-micron-technology-inc-mu-stock-ignore-it/.

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