Micron Technology, Inc. (NASDAQ:MU) stock has recovered from an early-August swoon. In fact, Micron stock recently hit its highest levels since early 2015, continuing a steady climb off 2016 lows, when MU stock hit single digits.
And it’s precisely that history that hangs over MU stock. Starting in late 2012, Micron stock climbed from $6 to $36+ in just over two years. Eighteen months later, MU dipped back below $10. The roller coaster ride taken by Micron stock last time out no doubt leads many investors to believe that another dip is coming – at some point.
That’s a big reason why MU looks so ridiculously cheap, trading at just 5.3x consensus EPS estimates for 2018. But those estimates show why some investors avoid Micron stock. Of 26 analysts surveyed, the highest estimate for 2018 is $7.77. The lowest is just $4.00.
There’s a tremendous amount of uncertainty looking forward, with most of that uncertainty coming from DRAM and NAND pricing. But even with that uncertainty, and the specter of the 2015-2016 plunge hanging over MU stock, I still don’t think it’s time to bail on Micron stock.
Micron Earnings Haven’t Peaked
The most obvious near-term fear is that Micron earnings are going to peak – and Micron stock will plunge as a result. But that hasn’t happened yet – and seems unlikely to happen any time soon.
Indeed, Micron’s fiscal Q3 earnings release was a blowout report. EPS of $1.62 not only beat consensus by $0.11, but marked a stunning reversal from a modest loss the year before. And yet Micron stock fell on the news, and didn’t recover those losses until very recently.
But there seems little reason to expect a peak in Micron earnings until its fiscal Q1 report toward the end of the year. In DRAM, pricing continues to increase, and supplies are likely to stay tight at least through the end of 2016, per industry sources. Solid-state drive pricing is rising as well, benefiting not only Micron but rival Western Digital Corp. (NASDAQ:WDC).
The fact is that both the solid-state and DRAM markets look reasonably healthy, even if early-year shortages appear to have been resolved – somewhat. More capacity is coming, including from Micron, but it won’t arrive until next year. The cycle will turn against Micron at some point, as it always does. But that turn isn’t on the immediate horizon – and the downside isn’t going to be the same this time around.
This Time Will Be (A Little) Different
The cynical argument toward Micron stock at $32 is that we’ve been here before, and it wound up with MU back in the single digits relatively quickly. But as William Tidwell at Seeking Alpha pointed out, CFO Ernie Maddock addressed precisely that point at a recent conference:
We’ve said that should we encounter a ’15-’16 cycle, it will be encountered in a different way…We would be cash flow-neutral to slightly cash flow-positive instead of burning through $2.7 billion in cash flow…I think that we’re very confident in our ability to navigate a ’15-’16 cycle with a dramatically different outcome than we had during that time.
That’s basically the core bullish argument for Micron stock at current levels. Few MU bulls believe the stock should be valued at 30x or 40x earnings – there’s an understanding that current pricing, and current earnings, won’t hold forever.
But that doesn’t necessarily imply that Micron should trade at 5x+ 2018 EPS. That multiple implies that 2015-2016 will repeat: that Samsung Electronics Co Ltd (OTCMKTS:SSNLF) will ramp capacity, that smartphone and PC demand will flatten, and that Micron will have to keep pace by competing solely on price.
That’s not likely to be the case. The memory space itself is different. Demand is much more diversified, coming from cloud, and Internet of Things, and even automotive applications. The resolution of the joint venture between Western Digital and Toshiba Corp. (USA) (OTCMKTS:TOSYY) should help control capacity as well. This time will be different for Micron.
Micron Stock Has More Upside
Cyclical stocks should see their multiple compress near the top. But Micron’s multiple suggests the peak is coming soon – and that the valley will be as painful as it was the last time around. Both arguments seem too conservative.
Again, it’s not as if Micron stock should be receiving the same valuation as high-flying, fast-growing Nvidia Corp. (NASDAQ:NVDA). But even a low double-digit multiple, in line with a company like Intel Corp. (NASDAQ:INTC), might not be too aggressive if growth continues into 2019 and the industry responds appropriately from a capacity standpoint.
That would imply a double in MU stock in a matter of years. And while it’s not guaranteed the stock will hit those levels, it’s still a possibility. Investors fearing the worst should remember that, if that worst doesn’t arrive soon, Micron stock still has a lot of room to run.
As of this writing, Vince Martin has no positions in any securities mentioned.
