The last six months have been fantastic ones for owners of Micron Technology, Inc. (NASDAQ:MU). Micron stock is up 62% since the middle of June, and is up more than 100% from May’s low, largely in step with a long-awaited recovery in the price of computer memory chips.
And yet, with a move of that size from MU stock in that short of a timeframe, it would be easy to presume there’s not much — if any — upside left to reap. The company swung to losses earlier this year, and thus far hasn’t been able to climb out of that rut.
Any pessimism regarding Micron, however, is shortsighted. Although it could be a while before MU stock is fairly valued on an earnings basis, this is a case where the trajectory is more important than the current reality.
MU Stock: DRAM, There and Back Again
Although Micron does more than just make computer memory, it is its bread-and-butter business. And, in the same sense (and largely for the same reason), the PC market hit a wall a few years ago, too much capacity and too little demand spurred a price-weakening glut of memory chips.
The numbers tell the tale. in early 2014, a 4GB DRAM chip cost computer makers almost $1.00 per gigabyte, more than doubling its cost from a year earlier on the heels of a PC sales melt-up.
The timing couldn’t have been worse, however. Not only did those attractive prices lead to an unsustainable swell in DRAM production capacity, it occurred right as the tablet revolution was taking hold. PCs suddenly became unnecessary, and consumers simply didn’t need as much memory in the handheld devices as they expected from their personal computers.
The end result: DRAM prices spent the next two years falling back to a price of roughly $0.30 per GB. Micron stock followed suit, peeling back from a late-2014 high of $36.59 to less than $10 early this year.
As they say though, nothing lasts forever. MU stock has since doubled in value, while DRAM prices have recovered to about $0.50 per gigabyte.
That strength is not only expected to persist, it’s expected to expand. Late last month, DRAMeXchange projected that DRAM could rise by as much as 30% during the fourth quarter of this year (they almost have), with a tight supply and rekindled PC demand likely to keep upward pressure on prices into 2017.
NAND memory prices are also expected to rise in 2017, as manufacturers switch from 2D NAND to 3D NAND and find that supply is relatively limited too. Thomas Coughlin of Storage Visions explained last week:
“3D NAND is still ramping up at most suppliers, and as a consequence, there is an expected shortage in flash memory that will occur in the not too distant future — not sure if this is the next few months, that depends upon demand. However flash memory for enterprise applications has special requirements and may be in short supply.”
It’s the best news owners of MU stock have heard in a long time.
MU: Positioning, at a Price
While the future looks much brighter than the recent past, Micron stock holdings have been forced to digest the fact that the company’s work to remain a market leader in the NAND and DRAM markets hasn’t been cheap.
MU’s recent acquisition effort is a prime example of the premise.
In December of last year, MU announced it was aiming to buy the two-thirds of Taiwanese memory maker Inotera that it didn’t already own. That deal was closed earlier last week, at a price tag of $4 billion. The pairing will give Micron access to Inotera’s DRAM production at cost, as well as its intellectual property. It’s also one less competitor MU stock won’t have to contend with.
Although Inotera was the only 2016 deal and arguably the highest-profile one in a while, it’s hardly the only one Micron has made as means of maintaining market share. It has not been a cheap journey though. Long-term debt has soared from $4.4 billion at the end of fiscal 2013 to $9.1 billion now, and the Inotara deal will add another $2.5 billion to the tally. That debt load cost the company roughly $135 million last quarter, shaving 13 cents worth of profit each share of MU stock.
Of course, some short-term pain is worth the long-term gain.
Bottom Line for Micron Stock
It’s never easy to get excited about buying a stock of a company that’s losing money, with no real clear picture as to when full profitability will be restored.
MU is arguably worth the discomfort though. The company was rocked by a perfect storm just two years ago, but the next two years are going to look very different. The supply glut problem is in the past, the upgrade cycle is spinning again, and memory prices are in excess of production costs. Micron stock is a good looking dark horse idea headed into 2017.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
