After enduring a 12% slump in the month of July, shares of memory chip maker Micron Technology (NASDAQ:MU) have enjoyed a few votes of confidence from the pros, including Jim Cramer, who today said MU stock is trading at a “ridiculously low multiple.”
The positive news also included Stifel Nicolaus reiterating its “Buy” rating on MU and Everspin Technologies (NASDAQ:MRAM) last week, citing bullish trends among NAND suppliers. Meanwhile, Notable Calls has cited a report by the Economic Daily News that Samsung Electronics (OTCMKTS:SSNLF), the world’s largest DRAM supplier, might increase DRAM prices by 10%-20% during the fourth quarter.
Traditionally, the second half is a seasonally hot period for DRAM manufacturers because of the holiday season. This time around the holiday bounty could be even more generous thanks to Micron, which allegedly shut down its fabs for two weeks in July. Experts say the shutdown likely lead to a 5.5% shortfall in DRAM supply during the month, which could exacerbate already tight supplies.
Just as well. Investors had begun fearing that the current DRAM boom was nearing a top after which everything would head south. But those fears seem unfounded.
Tailwinds for MU Stock
After a three-year slump, DRAM prices started climbing during the second half of 2016, and the momentum has carried on through 2017.
Although DRAM demand by the smartphone market has been tepid, technology migration by most manufacturers has been slower-than-expected leading to tightening supplies. Most manufacturers are unlikely to take on additional production capacity in the near-term, meaning the situation might last for another year or even longer.
But that’s just part of what the average Micron investor has had to grapple with. Many reckon that China’s ongoing interest in the space will disrupt the global memory market before long. Overheated Chinese investments in solar panels, displays, LEDs and steel led to a serious supply overhang and depressed prices everywhere.
But the truth of the matter is that most memory chipmakers are naturally wary of licensing technologies to Chinese manufacturers.
Creating a chip company from scratch to commercialization capability is hard enough without having to worry about partnering with established players who view you as potential competition. China imports chips worth $200 billion every year, making it the world’s largest net importer of semiconductor chips. The Beijing government has been aggressively trying to expand local production mainly through acquisitions, a good example being Tsinghua Unigroup’s $23 billion failed bid for Micron in 2015.
Currently, the only credible threat that is likely to emerge from the Middle Kingdom in the not-so-distant future is a little-known company by the name of XMC. The company reportedly is developing leading-edge 3D NAND chips that could enter mass production by 2018. The company, however, does not expect to become a tier-one NAND supplier till 2030.
Meanwhile, Micron remains a predominantly DRAM company, and thankfully that’s where the real action is happening at the moment.
Looking a Gift Horse in the Mouth
According to DRAMeXchange, the average contract prices for PC DRAM modules clocked in at $24 in Q1, up 40% sequentially, then climbed to $27 in Q2. Citi, on the other hand, sees demand exceeding supply by 2% this year and another 5% next year, making for continued price recovery.
These trends helped Micron enjoy a massive third quarter (sales growth of 92% YoY), and the party might not be over yet.
MU stock is still up 27.8% in the year-to-date, but still looks cheap compared to its growth profile with earnings slated to grow 155% over the next five years. Savvy investors should stop looking a gift horse in the mouth, and instead should take full advantage of the the cyclical upturn in the DRAM and NAND markets.
Buy Micron stock now.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
