Why Micron Technology, Inc. (MU) Stock Remains a Strong Buy

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Shares of Micron Technology, Inc. (NASDAQ:MU) have been under pressure, falling as much as 11% to a recent low of $28.56, ever since the semiconductor giant last month reported fiscal third-quarter earnings results. But industry trends suggest now is an ideal time to own MU stock, which despite its 38% year-to-date returns, can deliver 32% more on its way to $40.

Why Micron Technology, Inc. (MU) Stock Remains a Strong Buy

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Global appetite for semiconductors remain high, according to a recent Semiconductor Industry Association (SIA) report, which shows a 22.6% surge in worldwide chip sales, reaching $32 billion. The SIA, which tracked the period that ended May 31, noted that this was the semiconductor industry’s strongest rate of growth on a year-over-year basis in seven years.

Micron Chips: You Can’t Eat Just One

“The global semiconductor market has settled into a period of significant and steady growth in 2017, with sales through May well ahead of the total from the same point last year,” said John Neuffer, SIA CEO. And, unlike last year, where mobile device demand from the likes of Apple, Inc. (NASDAQ:AAPL) and Samsung Electronics (OTCMKTS:SSNLF) caused one segment of chips to do all of the heavy lifting, Neuffer noted that chip market growth has remained steady across all product categories in all major regional markets.

As it stands, there has been a better-than 30% rise in chip revenue expansion in the Americas, while China and Europe have realized respective increases of 26% and 18%. And here’s the thing: Neuffer noted that, in particular, memory chip sales remain the industry’s fastest-growing segment. “Significantly, recent market growth has been consistent across all major regional markets and semiconductor product categories, with sales of memory products continuing to lead the way,” he said.

And this makes Micron — the leader in the memory chip category — an obvious choice for investors who are looking for a stock that can outperform the market in the next 12 to 18 months. The company, which has posted consecutive quarterly earnings beats, continues to benefit from a revived demand for its DRAM and NAND memory chips.

MU Operating on All Cylinders

Despite crushing Street estimates on both the top and bottom lines, the Idaho-based company was swept in the selloff wave that engulfed tech stocks in general, and in particular chipmakers, including Nvidia Corporation (NASDAQ:NVDA) and, to a lesser extent Broadcom Ltd (NASDAQ:AVGO). But given the rate at which Micron profit margins are rising, the best is yet to come for MU stockholders.

Micron reported third-quarter revenue of $5.57 billion (up 92% year-over-year) and adjusted earnings-per-share of $1.62 (up from negative $0.03 a year ago), easily beating consensus estimates of $5.41 billion and $1.52. The beat was driven by adjusted gross margin of 48%, which arrived at the high end of a 44% to 48% guidance range and up sharply from the second quarter’s 38.5% and the year-ago period’s 18.1%.

What’s more, the company guided for August quarter revenue of $5.7 billion to $6.1 billion (up 83% at the midpoint), while adjusted EPS of $1.73 to $1.87 exceeds consensus of $5.62 billion and $1.58.

Management also issued fourth-quarter gross margin guidance of 47% to 51%, which implies expansion of 100 basis-point sequential gain at the midpoint. And given the fact that DRAM accounts for 64% of Micron’s revenue and about 70% of its gross profit, it would be a mistake to part with this winner now.

Bottom Line for MU Stock

If you were one of the few investors who bought MU stock when I recommended it back in February, when the shares traded at around $23, you’re welcome. And when factoring its June 9 high of $32.93, this marks a 40% jump since my buy recommendation. Micron shares are still priced attractively at just five times fiscal 2018 estimates of $6.02 per share, against a forward price-to-earnings ratio of 19 for the S&P 500 index.

MU stock, which is priced on the assumption of little-to-no growth, can easily reach the $40 target by year’s end, delivering 33% returns from Thursday’s closing price of $30.10. And when factoring the SIA’s semiconductor growth forecast, combined with Micron’s gross profit improvements, good luck finding a better chip stock than Micron that offers the combination of growth and value.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/micron-technology-inc-mu-stock-remains-strong-buy/.

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