After reporting a solid third quarter, Micron Technology Inc. (NASDAQ:MU) should have continued its move higher in the markets. It benefited from higher sales and favorable pricing for DRAM and NAND, which is a trend that will likely continue. Yet, investors ignored Micron’s strong prospects, and now MU stock is trending below the $30.
Micron reported a non-GAAP gross margin of 48% — that’s impressive. What’s more, manufacturing costs for DRAM and NAND fell, while Micron’s operating cash flow doubled to $4.9 billion.
The company ended the quarter with $4.93 billion in cash. Looking ahead, Micron expects margin expansion for its mobile business unit. Helped by a shift to 20-nanometer LPD RAM, favorable pricing and stronger demand as customers introduce new flagship smartphones, Micron is well-positioned to outperform.
Augmented reality (AR), along with high-resolution displays now require massive amounts of storage. These gadgets need between 4 to 6 gigabytes of LPDRAM. Alphabet Inc (NASDAQ:GOOGL) is already re-launching Google Glass 2 to target the industrial space. Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) is still benefiting from Pokémon Go, which is the first augmented reality game to become a large-scale hit.
Strong SSD Growth
Micron said most of its growth came from cloud customers. The segment’s revenue doubled sequentially from last quarter as demand for SSD (solid state drives) on a 32-layer TLC 3D NAND rose.
Looking ahead, Micron forecasts DRAM supply growing 15% to 20% in 2017. The market for NAND is even more promising, where supply will match demand by growing by between 30% to 40%.
Industry demand will continue through 2018. Mobile devices and data centers continue to drive demand for SSD-based storage. Mobile accounts for 20% of Micron’s business, while the server market is 30% of total revenue.
Upbeat Graphics Market
Micron is strategically positioned to benefit from the growth in demand for graphics cards and related technologies requiring high-performance memory.
In the latest quarter, it ramped up production of discrete DRAM, which is used in GDDR5X. Graphics revenue grew in the double digits, thanks to companies like Nvidia Corporation (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) launching new video cards. Nvidia’s G5x-based Titan Xp is noteworthy, which it touted as the world’s most powerful graphics card, based on the Pascal architecture. Strong console performance also helped drive sales.
Micron forecasts free cash flow of around $3 billion. It will use those funds to pay down debt while still investing in the business. Capex (capital expenditure) will be in the range of $4.8 billion to $5.2 billion for fiscal 2017.
In the near-term, Micron’s August quarter will experience a slightly lower rate of growth, probably due to seasonality. Still, the NAND business will show better operating efficiency. Micron aims to cut costs by 20% to 25% in this segment.
Bottom Line on MU Stock
MU Stock is hardly pricing in the strong growth levels ahead. At a forward price-earnings ratio of just 5, value investors should consider buying the stock at prices below $30 a share and more aggressively if it drops. This bullish sentiment has risks.
If stocks in the semiconductor sector start selling off, Micron could get pulled lower, too. But the smartphone and data center markets are healthy and will sustain the strong demand for memory and storage. This makes holding Micron ideal for patient investors.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.