While the broader indices are struggling for gains today, Micron Technology, Inc. (NASDAQ:MU) stock is heading higher by roughly 2% after Citi said in a note that June notebook shipments were up a better-than-expected 17% month-over-month.
Strong notebook shipments are certainly good news for MU, but it’s not at the core of the chip-maker’s growth story. That is why the stock is only up some 2%, still off its late June highs, and trades at just 6.6 times fiscal year 2017 earnings-per-share estimates. Investors remain concerned that a cyclical downturn in China semiconductor demand means semiconductor stocks are at a cyclical peak.
But that analysis is an over-simplified look at Micron’s multifaceted growth. In truth, MU is growing in so many different hyper-growth markets that growth isn’t going to slow much over the next several years.
That is why almost every analyst on the Street is bullish on MU, with an average price target that implies 35%-plus upside.
I am just as bullish.
Here’s why.
Micron Is a Multiyear Growth Story
In short, Micron touches all parts of the market investors want to be exposed to.
First, Micron is exposed to the cloud growth story. As companies transition to storing data in the cloud, demand for MU’s chips grows. This is a secular transition, but it’s also happening quite quickly. Last quarter, Micron’s revenue from cloud customers was more than 4 times higher year-over-year. This trend is showing no signs of slowing, and cloud growth should remain a huge tailwind for MU over the next several years.
Second, Micron is exposed to the huge mobile growth story. In today’s world, everything is going mobile — mobile shopping, mobile gaming, mobile communication, mobile photography, and so forth. As smartphone workload demands increase, demand for MU chips likewise increases. Similar to the cloud, mobile is a multiyear growth story.
More near-term, MU should get a huge boost this fall from some big smartphone launches.
Third, Micron is exposed to the connected home growth story. It should be no surprise that last quarter was a record quarter for MU in its connected home business (record quarterly revenue and record NAND shipments). After all, it is no coincidence that Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), and Amazon.com, Inc. (NASDAQ:AMZN) are all making huge investments into this space.
Consumers have fallen in love with the idea of controlling everything from their smartphone. In this sense, the connected home growth story parallels the mobile growth story. Demand for connected home products will continue to exponentially increase over the next several years.
Fourth, Micron is exposed to the revamped video game growth story. The video game industry is getting a makeover this year, led by new augmented and virtual reality-based gaming consoles. MU is reaping these rewards. The company’s graphics segment saw double-digit revenue growth last quarter, driven by strength in the game console market. As AR and VR gaming grow in popularity, so too will MU’s graphics revenues.
All in all, because Micron is exposed to so many multiyear growth stories, Micron itself is a multiyear growth story, regardless of a cyclical downturn in China. Cloud, mobile, connected home, and AR/VR are the types of industries investors want to be exposed to over the next several years. By buying MU stock, investors can be exposed to all of those markets at once.
MU Stock Can Head Higher
The value proposition with MU stock is that it’s dirt cheap because of concerns regarding peak cycle.
Let’s do some math here. MU stock is around $31. Earnings per share this year are expected to be around $4.70. That means Micron is trading around 6.6-times this year’s consensus EPS. That is a pretty attractive multiple. Granted, the company is entering an era of peak earnings wherein analysts actually expect EPS compression in fiscal year 2019, but EPS in FY19 is still expected to be $5.
In other words, while FY18 might be a near-term earnings peak for MU, the drop-off isn’t that big. Moreover, the $5 EPS expected in FY19 is still higher than the $4.70 expected this year.
All in all, MU will grow earnings from the FY17 base of $4.70. A 6.6 times multiple for any level of positive growth is an attractive set-up for multiple expansion.
Bottom Line on MU Stock
Irrational concerns regarding a cyclical downturn in the semiconductor industry are creating a long-term buying opportunity for investors into Micron.
As of this writing, Luke Lango was long MU and AMZN stock.
