The good times for Micron Technology, Inc. (NASDAQ:MU) are going to end at some point. It might not seem like that right now. MU stock has quadrupled in 18 months. Analyst after analyst is raising his or her MU stock price target. MU stock news has been nothing but good.
What hangs over all that good news, however, is the cycle in memory pricing. As MU bulls and bears know (or should know), we’ve been here before. Between early 2013 and early 2016, the MU stock price went from just above $5 to over $35 to under $10.
And so, with MU just off a 15-year high, there has to be somewhat of a “this time is different” case for Micron stock to justify buying at these levels. Either the cycle will run longer than it did last time, driving peak earnings higher than expected, or the downside of the cycle won’t be nearly as bad as it was the last time around.
The good news for MU at the moment is that it seems like both are possible. And that suggests the MU stock price target should move higher — even after a 300%+ run.
Cyclical Risk and the MU Stock Price
It’s always useful to understand the risks first — and Micron stock has its share. Again, the cycle has played out before, with Micron burning over $2 billion in cash at the bottom of the last cycle.
And so an investor can’t just take the price-earnings ratio of MU stock and think the stock has upside. On that basis, Micron would have to more than double to have the same P/E ratio as Intel Corporation (NASDAQ:INTC) and would have roughly 500% upside to match the multiple of Nvidia Corporation (NASDAQ:NVDA), which isn’t growing as fast as Micron, at least of late.
This is a different situation, however. Pricing of CPUs made by Intel and Advanced Micro Devices, Inc. (NASDAQ:AMD) don’t fluctuate to the same extent Micron’s NAND and DRAM memory chips do. These pricing moves offer almost free money on the way up — and collapse margins on the way down.
Again, this cycle is going to turn at some point. The question is how much cyclicality remains priced into MU stock — and when are things going to turn.
Don’t Sell Micron Stock Yet
As far as MU stock news goes, there’s no reason to see the turn coming anytime soon. Certainly, there was no sign of it in Micron earnings. The latest report was a blowout, as Bret Kenwell pointed out earlier this month. Revenue was $6.1 billion, and adjusted earnings per share was $2.02. Two years earlier, revenue was just $3.6 billion, and non-GAAP EPS just 37 cents.
Micron numbers aside, both NAND and DRAM still look strong. A suspension of NAND production by Toshiba Corp (USA) (OTCMKTS:TOSYY) has tightened supply in NAND, the smaller of Micron’s two key product lines. As far as DRAM goes, Micron CEO Sanjay Mehrotra said on the fourth-quarter conference call that the “DRAM industry supply/demand balance is expected to stay healthy throughout calendar 2018.” In other words, the next five-plus quarters for Micron.
As far as pricing goes, this time does look different. Last cycle, it was Samsung Electronics Co Ltd (OTCMKTS:SSNLF) that ramped up production. This time around, industry participants don’t want a repeat of sky-high supply and collapsing products.
Meanwhile, demand has increased as well. DRAM usage in smartphones and data centers lessens the sector’s reliance on sales to the declining PC industry. This space is healthy — and it should stay healthy, at least for the mid-term. And that’s good news for MU stock.
MU Stock Price Target: $50+
Even taking into account the cyclical factors, there’s still a reasonable argument for MU stock to trade above $50. Earnings, at least based on analyst estimates, will peak in fiscal year 2018, with a consensus of $7.58 EPS.
But if $7.58 is the peak, and FY15 non-GAAP EPS of $2.72 is closer to a bottom, Micron’s average earnings power still works out to $4-$5 per share. Even a low double-digit multiple, in the range of INTC, values MU stock in the $50s.
Near-term, meanwhile, there’s just no reason to sell MU stock. Industry news is good. MU stock news is good. Joseph Hargett discussed the technical backdrop of MU stock last week, but, from here, it’s a chart that isn’t worth fighting. With the fundamentals and the technicals seemingly lined up, I think there’s more upside in Micron stock.
At the least, a trader would seem a fool to fight against them.
As of this writing, Vince Martin has no positions in any securities mentioned.