Morgan Stanley (NYSE:MS) analyst Joseph Moore recently had some positive things to say about Micron Technology, Inc. (NASDAQ:MU) and MU stock, suggesting $36 per share was in the cards over the next 12 months.
“Memory shortages have abated somewhat based on our conversations with computing customers,” Moore wrote in a note to clients. “But, the market is still healthy with most cloud participants indicating an expectation that supply will remain tight through next year, and continued increases in mobile DRAM in 4q.”
So, the back and forth tug of war going on right now with Micron stock is all about supply and demand, not unlike the oil and gas industry. Only, in Micron’s situation, the supply remains tight but appears to be growing.
We all remember what happened to oil and gas stocks as supply increased dramatically — they got crushed. The same could happen to MU stock and its peers.
In June, I recommended investors ride Micron’s momentum higher as rising DRAM prices translate into record revenue and profits for the company. MU stock was around $32 at the time; two months later it’s off almost 5% through August 18 as a result of this pricing uncertainty.
What to Do?
At the end of July, I suggested that Micron’s stock was fairly valued to slightly undervalued. I don’t think anything’s happened to make me think otherwise. In fact, Micron had a cash return (free cash flow plus interest expense divided into enterprise value) of 2.7%. It’s now 2.4%.
At the same time, Intel Corporation (NASDAQ:INTC) had a cash return of 7.0%. It’s now 7.2%, meaning Intel’s valuation by this particular metric has gotten cheaper while Micron has gotten a little more expensive.
My inclination is to hold tight and wait for the situation regarding supply and prices to become clearer in the weeks ahead before buying or selling.
MU Stock at $36 Is Possible
Despite the stall in its stock price in recent weeks, Micron is only 18.5% below Morgan Stanley’s target. MU stock delivered 8.5% appreciation in just the five day’s trading from August 14-18. Micron’s volatile stock price sometimes works for investors, not against them.
A blowout earnings report in early October ought to help, but in the near term, only slowing capacity from Micron and its peers will get it over the top. Long-term, I agree with Vince Martin, my InvestorPlace colleague, who believes its revenue diversification in recent years makes it a much better investment.
“Over half of DRAM sales come from server and specialty applications — both growing markets,” Martin wrote August 14. “Over 40% of NAND revenue comes from solid state drives (SSDs) and automotive/industrial. Those growing categories should help demand on a unit basis. That in turn should mitigate some of the brutal swings of pricing that make Micron earnings so choppy. And it means that underneath those swings, there’s a business with real, if not spectacular, long-term growth potential here.”
I couldn’t have said it better myself.
Let it Ride
It’s at times like these that investors want to be reassured that things are going to work out and their shares are going to be worth more in 12 months than they are today.
I can’t tell you that.
What I can say, though, is that Micron feels so strongly about the future of its memory and storage technologies that it’s doubling the size of its cleanroom space in Boise to spur additional innovation at the company.
The saying, “This time it’s different,” comes to mind.
Micron appears to be turning a corner that should produce a more stable business, which in turn should lead to less volatility in MU stock, but also less upside.
That’s a good thing, actually. If you’re buying for a short-term pop, I’d be hesitant. However, I could easily see $36 within the next 12 months.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
