Micron Technology, Inc. (NASDAQ:MU) stock rose to a new 52-week high on Friday, reaching $33.02 as investors applauded comments made by the management which exposed the falseness that the company’s memory chip business had peaked and was due for a fall. And despite gaining 18% over the past month, Micron stock is setting up for even more growth.
Micron stock closed Friday at $32.35, which amounts to a 7% return since I last told you to just buy the stock and stop trading it. And if you’re keeping score at home, the shares have skyrocketed 41% since I first recommended Micron stock in February when it traded at around $23. Last week at the Citi 2017 Global Technology Conference, Micron management affirmed more reasons to expect prices to reach $40 in the next 12 to 18 months.
Can Micron Stock Remain Strong?
Micron, as have competitors such as Samsung Electronics (OTCMKTS:SSNLF), Toshiba (OTCMKTS:TOSBF) and Western Digital Corp (NASDAQ:WDC), has benefited from a strong rebound in demand for both DRAM (dynamic random access memory) and NAND — flash memory for electronic devices such as tablets and MP3 players. However, there are doubts that the growth rate for DRAM, which is predicated on supply shortages, is sustainable.
The company, which is now delivering strong profit margins, has in the past suffered from a supply glut in the DRAM and NAND chips market. And there is persistent fear that this will reemerge. The fact that DRAM accounts for 64% of Micron’s revenue and about 70% of its gross profits makes investors hesitant about betting too much on Micron. The fear is, any slight change in the DRAM industry, resulting in oversupply, can negatively impact Micron’s pricing power.
It’s for this reason MU stock is priced so cheaply at just six times fiscal 2017 estimates of $4.72 per share, against a forward P/E of 19 for the S&P 500 index. And based on fiscal 2018 estimates of $6.12 per share, the forward P/E drops to five. Essentially, the market assumes little-to-no growth for the company even though Micron has beaten analysts’ earnings estimates in seven straight quarters.
At the Citi 2017 Global Technology Conference, Ernie Maddock, Micron’s senior vice president and chief financial officer did his best to assuage investor concerns. While citing strong demand for data storage and data processing as the key drivers of growth, Maddock said he expects the market for for both DRAM and NAND to remain robust for the rest of fiscal year 2017 and well into fiscal 2018. Among the growth factors, Maddock cited the collection and use of data, as well as rate of expansion and applications use in the automotive sector. This is more than just lip service.
Aside from crushing Street estimates on both the top and bottom lines in its fiscal third quarter, Micron also issued fourth quarter gross margin guidance of 47% to 51%, which implies 100 basis-point sequential margin expansion at the midpoint. The strong guidance affirms management’s expectation that the DRAM market to remain strong in the second half off the year. What’s more, the company guided for fourth quarter revenue of $5.7 billion to $6.1 billion (up 83% at the midpoint), while adjusted EPS of $1.73 to $1.87 is higher was higher than consensus of $5.62 billion and $1.58.
Ensuring Long-Term Success
In addition to the growth rate Micron expects, the company is also working to prevent experiencing the same level of weakness it suffered during the height of the DRAM glut. To that end, Micron is working to slash its exposure in commoditized memory — the type that is prone to the ups and downs of the market forces of demand and supply.
Conversely, Micron wants to grow in areas such as artificial intelligence (AI), autonomous cars, big data analytics and a host of other realms of specialized memory that are less commoditized. These efforts should quell fears about worsening demand and increasing supply in the industry. And even if these events were to unfold Micron stock — thanks to better cash flows — would have been better prepared to whether the storm.
Bottom Line for Micron Stock
Micron stock, which has surged almost 50% year to date, is not the bargain it was back in February when I first recommended the shares at $23. But the company is operating in a market where demand for DRAM chips will continue to grow. But with some patience, MU stock will reach reach $40 by this time next year, delivering 23% returns.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.