Shares of Micron Technology, Inc. (NASDAQ:MU) have been on fire in 2017, climbing nearly 36%. Some may refer to MU stock as a bubble and expect a collapse at some point. People say this about Advanced Micro Devices, Inc. (NASDAQ:AMD) and Nvidia Corporation (NASDAQ:NVDA), too. While it’s true Micron operates in a sort of boom-and-bust industry, it’s still got some boom left to go.
Why Believe in Micron?
Just a few weeks ago, Micron beat on earnings per share and revenue estimates for its fiscal third quarter. The results were actually pretty impressive. Without getting into too many details (which can be read about in more depth here), Micron is generating huge cash flows. Operating CF has grown more than 100% through the first three quarters of the year compared to fiscal 2016.
Revenue set a third-quarter record, which grew 20% sequentially and more than 90% year over year. Micron President and CEO Sanjay Mehrotra, had this to say:
“The global trends taking shape today, including machine learning and big data analytics, are exciting and create significant opportunities for Micron. We are focused on positioning the company to realize these opportunities by investing in technology and products while also strengthening our balance sheet.”
AI/machine learning and data analytics are long-term secular tailwinds, which is exactly the kind of thing that should help Micron. The NAND and DRAM business is great when MU has pricing power and demand is high. When the market is in a state of oversupply, though, shares can go through the ringer.
Right now, MU stock will go higher for two reasons. In the short term, the NAND and DRAM markets remain in high demand and tight supply, which should continue to pad Micron’s top and bottom lines. Over the long term, however, the hope is that machine learning and other technologies will make for a more consistent business.
Valuing Micron Stock
The tight DRAM/NAND market won’t last forever, but it’s not topping out, yet, at least not to our knowledge. Analysts expect MU sales to grow 62% this year and a casual 11.5% in 2018. Earnings estimates of $4.71 per share in 2017 are forecast to grow to $6.02 next year. That’s good for nearly 30% EPS growth.
So, what exactly are we paying for this type of growth — probably a lot, right? Fortunately, that assumption is wrong. MU stock trades with a price-to-earnings ratio of 14 and with a forward P/E ratio of 5.3. That’s darn cheap for a stock with this strong of growth.
Of course, MU stock should trade with some sort of discount due to its volatile business model. Trying to decide a “fair multiple” is futile. We don’t make the market, nor do we decide what’s fair value. We just make decisions on what it presents to us. In this case, buying MU stock makes sense. Here’s why: Its valuation is so low that unless its business starts to slow, Micron stock should continue to trudge higher. In other words, overvaluation isn’t a catalyst to send shares lower, given the current environment.
As long as Micron keeps delivering and the NAND/DRAM markets remain relatively strong, MU stock has little reason to go lower.
Trading MU Stock
MU stock was a thing of beauty. It may be hard to see its 50-day moving average, which is almost completely hidden by our black trend line. But this stock was a bull’s dream, as it steadily climbed higher and bounced on support.
It’s multiple levels of support — most notably its trend line and 50-day MA — suddenly failed, though. Luckily, MU stock has been a in a very solid trend and its 100-day moving average is nearby. However, with trend now broken and the stock below its 50-day moving average, I would be leery. Additionally, its MACD, which measures momentum, has abruptly swung bearish (purple circle).
Bulls desperately need this level to hold as support. If its 100-day moving average fails, a retest in the low-$26 range could be in the cards. There’s little doubt in my mind that MU will be higher by year’s end. But in order to move higher, it needs to get back above its previous trend line.
If it does, MU stock may encounter some resistance near $33, where its annual highs rests. However, should it breakout over that level, big gains could be had, as little overhead resistance will slow it down. For bulls looking to buy, they can do so now with a stop-loss below the 100-day moving average. Or they can wait for Micron stock to recapture its trend line and 50-day moving average before getting long.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in MU.
