After hitting a 52-week high, Micron Technology, Inc. (NASDAQ:MU) took a hit, dropping about 6%. But when putting this into perspective, the move does look kind of minor.
Keep in mind that MU stock is still up a sizzling 36% for the year. So it does seem reasonable that there should be some type of correction, and today’s near-4% gain will likely stick.
Yet the main issue is: What’s in store for MU stock going forward? Is the recent drop the opportunity investors believe it to be judging by today’s action? I think so.
Of course, the weakness in MU stock is due to expectations that got too overeager regarding earnings. Even though the company beat the official estimates, the “whisper numbers” were a bit more enthusiastic. No doubt, this is fairly common for a stock that has lots of momentum. Even a small deceleration can have a big impact.
Despite all this, the fundamentals for Micron are still rock solid. For the quarter, revenues shot up a sizzling 92% to $5.57 billion (there was a 20% quarter-over-quarter jump) and net income came to $1.6 billion, or $1.40 billion, compared to a loss of $215 million, or 21 cents a share in the same period a year ago.
There are several keys to the strong growth. One is that — over the years — Micron has diversified its business beyond PCs. The result is that there are now multiple drivers, such as:
- Compute and networking business unit: This represents 43% of revenues or $2.39 billion.
- Mobile business unit: For the quarter, the revenues came to 20% of revenues or $1.13 billion.
- Embedded business unit: This segment is focused on emerging categories like the IoT (Internet-of-Things) and automotive. As for the revenues, they are about $700 million or 13% of revenues.
- Storage business unit: This category is made up of things like SSD sales. And the revenues, during the quarter, came to $1.32 billion or 24% of revenues.
Momentum and MU Stock
The supply-demand environment remains healthy. For the year, MU forecasts that the supply of DRAM chips is likely to show an increase of anywhere from 15% to 20%. But this is expected to be “slightly” under the demand. That is, there should continue to be robust pricing in the industry.
This supply-demand situation probably won’t be temporary either. Micron forecasts that it will remain positive throughout 2018.
And this should not be surprising. On the supply side, the industry only has four main semiconductor operators and they have continued to be restrained in their production. As for demand, there are plenty of secular drivers, such as with cloud computing, virtual reality (VR), augmented reality (AR) and machine learning. All these require high-powered memory chips.
Now another important catalyst for MU stock is that there will likely be a surge in spending on mobile phones during remainder of the year. Of course, a key part of this will be due to the highly anticipated launch of the Apple Inc. (NASDAQ:AAPL) iPhone. As it is the ten-year anniversary of the revolutionary device, the expectation is that the new smartphone will be standout.
Rumors are that it will have features like an OLED display, bezel-less screen, better water-proofing, wireless charging and AR. Consider that — for the fiscal fourth quarter — Micron expects revenues of $5.7 billing to $6.1 billion, up from the Wall Street consensus of $5.6 billion.
Finally, MU stock price continues to trade at reasonable levels. Note that the forward price-earnings ratio is at a mere 5X. In comparison to other semiconductor stocks, Texas Instruments Incorporated (NASDAQ:TXN) sports a multiple of 19X and Intel Corporation (NASDAQ:INTC) trades at 11X.
In other words, there’s quite a bit of room for multiple expansion on MU stock, especially given the strong momentum in the business.
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.
