Since late December, the shares of memory-chip maker Micron Technology, Inc. (NASDAQ:MU) have traded in a range of $22 to $23. Then again, this has come after a big-time move on the upside. During the past 12 months, MU stock has netted a return of nearly 100%.
So perhaps the shares are topping out here? Or could there still be more room for gains?
Well, I think the bull run is far from over. First of all, MU has done quite a bit to transform its business, such as with disciplined cost cutting. The result is that the company continues to crank out juicy cash flows. In the latest quarter, they came to $1.1 billion, up $200 million on a quarter-over-quarter basis.
But the company has also made strong efforts in diversifying its business, especially by lessening its dependence on the lagging PC business. Consider that the DRAM revenues for this segment currently represents only about 15% of revenues.
Oh, and Micron stock should get a boost from its acquisition of Inotera. The deal not only eliminates a pesky rival but also gives access to a substantial portfolio of intellectual property. In fact, MU paid a dirt-cheap 2.2 times Ebitda.
In light of this, it should be no surprise that the deal is likely to provide some nice benefits. Note that analysts at UBS Group forecast that MU will see a 2% to 3% improvement in gross margins.
MU Stock and the Positive Industry Fundamental
Perhaps the biggest driver for MU is the supply-and-demand situation. And, for the most part, it’s looking pretty good. On the supply side, much of the excess has been washed out since the market hit a glut a couple years ago. More importantly, it will likely take time for new capacity to get churned out. Keep in mind that — during the past two years — there has been only one major chip fab manufactured. Of course, another positive is that there are only two other large chip operators left on the market, which include Samsung Electronics (OTCMKTS:SSNLF) and SK Hynix Inc. (OTCMKTS:HXSCL).
So yes, pricing has gotten much more attractive lately. Since early summer, 16 GB of DDR4 DRAMs have gone from $80 to $103 — and there has also been similar strength with NAND chips.
Now, on the demand side, there are certainly positive signs as well. There continues to be secular trends like mobile, embedded systems and cloud computing that should bolster spending on memory chips.
The result? The earnings for MU have been perking up. In the latest fiscal Q1 report, revenues jumped 18.5% to $3.97 billion and the adjusted earnings came to 32 cents a share.
Bottom Line on MU Stock
No doubt, the bull case for Micron stock is not foolproof. Let’s face it, China is likely to be a major factor as Micron looks for ways to bulk up chip production.
However, this will take time. Besides, the valuation on MU stock is still fairly attractive, despite the run-up. The current multiple is at a rock-bottom eight times forward earnings. By comparison, Intel Corporation (NASDAQ:INTC) trades hands at 13 times future earnings, Texas Instruments Incorporated (NASDAQ:TXN) trades at a multiple of 21.5 and Qualcomm, Inc. (NASDAQ:QCOM) is at 13.
Thus, if MU could get to even a multiple of 11 — which seems reasonable in light of the growth prospects — the shares could easily fetch $30-plus in the current year.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like 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.
