Why Micron Technology, Inc. (MU) Stock Is Heading to $40

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Save for Nvidia Corporation (NASDAQ:NVDA) and, to a lesser extent Broadcom Ltd (NASDAQ:AVGO), you would be hard-pressed to find a semiconductor stock hotter than Micron Technology, Inc. (NASDAQ:MU), which has skyrocketed nearly 41% year to date and 153% over the past year.

Why Micron Technology, Inc. (MU) Stock Is Heading to $40

If you were one of the few who bought MU stock when I recommended it back in February, when the shares traded at around $23, you’re welcome. MU stock closed Tuesday at $30.83. And when factoring its June 9 high of $32.93, this marks a 40% jump since my buy recommendation. As evidenced by the 6% pullback from $32.93, which coincides with an overall selloff in tech, investors have begun to lock in some profits. There’s nothing wrong with that.

Reasons to Love MU Stock

In the case of Micron, however, it would be a mistake to part with this winner now. The same bullish arguments I placed back in February are still in play today. And, given Micron’s better-than-expected earnings results combined with upbeat guidance, MU stock should now reach $40 in the next 12-18 months, delivering 28% returns from current levels.

Not only is Micron benefiting from improved pricing in the DRAM and NAND memory chip market, MU continues to benefit from improving profit margins, too, which has helped the Boise, Idaho-based semiconductor company beat Wall Street’s bottom-line forecasts seven straight quarters. And, there’s no signs of slowing down. What’s more, despite the recent gains, MU stock is still priced attractively at just seven times fiscal 2017 estimates of $4.29 per share, against a forward P/E of 19 for the S&P 500 index.

When projecting out to fiscal 2018 earnings-per-share estimates of $5.17, which assumes year-over-year EPS growth of 20%, drops the forward P/E to six. This means if MU stock was priced on par with the rest of the market, the shares would be valued today above $90, or almost 200% above current levels. Notably, this is even though Micron has begun to take market share from competitors such as Samsung Electronic (OTCMKTS:SSNLF), Toshiba Corp NPV (OTCMKTS:TOSBF) and Western Digital Corp (NASDAQ:WDC).

The company is set to report third-quarter fiscal 2017 earnings results on June 29. Ahead of the quarter, Credit Suisse analyst John Pitzer, who has an Outperform rating on MU stock with a $40 price target, believes Micron still has tons of gas left in the tank. In a note released to investors last Wednesday, Pitzer sees Micron beating May’s quarterly results and issuing strong guidance for the August quarter. One of Pitzer’s main bullish points is that the cost of Micron’s capacity is increasing structurally.

As such, he expects Micron to post EPS of at least $1.60 for the just-ended quarter, which is 10 cents above Street estimates. Pitzer also expects EPS for the quarter ending August to be $1.89, which is also above Street consensus of $1.56. It would seem that Pitzer agrees with my argument that new CEO Sanjay Mehrotra has made the best out of what was once a bad situation where DRAM and NAND chips, those found in portable devices like tablets and MP3 players, had become commoditized.

Bottom Line for MU Stock

The fact that 60%-65% of Micron’s revenue comes from its DRAM chip business, which grew in the second quarter by almost 60%, suggests the market has taken a turn for the better. Assuming Micron can achieve higher gross margins, combined with favorable DRAM pricing in the next two quarters, MU stock can reach my $40 target by year’s end, never mind 12-18 months.

All told, good luck finding another semiconductor company offering the combination of growth and value as Micron.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/why-micron-technology-inc-mu-stock-heading-to-40/.

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