Boom, bust, boom. That has been the story of Micron Technology, Inc. (NASDAQ:MU) for the past 20-plus years. Good has followed bad, and bad has followed good.
Big revenue growth is followed by big revenue declines which is followed by big revenue growth again. Huge profit margins are followed by negative profit margins which are followed by huge profit margins again. MU stock highs are followed by MU stock lows which are followed by MU stock highs again.
MU is the textbook definition of a cyclical stock. And there are two things to remember about cyclical stocks: 1) the good times don’t last forever, and 2) as long as the music keeps playing, the stock will keep heading higher.
Currently, MU is in a very good era and the music is playing full-boar. You have all the cloud computing demand tailwinds and the mobile workload ramp tailwinds. Those are coming together to create robust demand. Meanwhile, you have a huge supply shortage which is keeping prices unnaturally high and providing a huge boost to the bottom line.
Micron’s earnings have gone from $0.26 per share in fiscal 2016 to $4.96 in fiscal 2017. They are expected to hit $7.58 this year.
The market is giving MU stock a mere 5.5-times multiple on fiscal 2018 earnings estimates because investors are well aware that this era won’t last forever. Earnings per share in the $7 to $8 aren’t hit to stay. It’s a near-term dynamic influenced by an unusually favorable supply-demand situation.
Some day, supply ramp will couple with weakening demand, and MU stock will spiral downward.
But that day is not today or tomorrow, or anytime over the next 12 months. During that time frame, MU stock will head higher.
Fundamentals Support a Higher MU Stock Price
I continue to believe that fiscal 2018 represents peak earnings for MU.
The general trend of under-supply will persist in the DRAM market. In 2018, robust end demand from the data center market will continue to couple with a lack of production, creating huge profits for MU. While demand will remain strong thereafter, production ramp will result in new fabs starting to hit the market in 2019. Volume expansion will be gradual and demand will remain robust, so MU’s profits won’t be wiped out, but they will erode some.
Consequently, I think the Street has it right in modeling for earnings compression after this year. Estimates for fiscal 2020 look a bit high at $5.50. Today, GAAP earnings stand at $4.41 per share. To be conservative, let’s say earnings look something like $5 per share in 2020.
At that point in time, peak cycle concerns should be in the rear-view mirror. That means MU stock should get a bigger multiple than it does today. Right now, MU stock is trading around 9.5-times trailing GAAP earnings.
MU stock should be able to fetch a 15-times multiple in 2020 as peak earnings concerns fade. A 15-times multiple on $5 earnings implies a price target of about $75.
Discount that back by a fairly aggressive 15% per year, and you get to a present value of about $49. MU stock price is currently just over $41.
Bottom Line on MU Stock
The music (general under-supply in the DRAM market coupled with robust demand) will keep playing into the foreseeable future. In order for the music to stop, there needs to be some sort of huge supply boost or huge demand tightening, neither of which we are presently seeing.
Instead, the outlook is for supply to gradually increase and demand to remain robust.
As such, the music will keep playing.
Until the music stops, MU stock will keep heading higher.
As of this writing, Luke Lango was long MU.
