For August, Micron Technology, Inc. (NASDAQ:MU) racked-up impressive gains, with MU stock shares up nearly 40%. In fact, for the year so far, the return is about 79%. Note that MU stock is now at levels not seen in 15 years!
Last week’s earnings report certainly highlighted why there is so much bullishness. In the fiscal fourth quarter, MU’s revenues soared by 91% to $6.14 billion and earnings came to $1.99 per share. The Street, on the other hand, was looking for $5.96 billion on the top-line and profits of $1.83 million.
But there was more for MU stock. The guidance also was robust. For the current quarter, the company expects revenues to range from $6.1 billion to $6.5 billion and earnings to be anywhere from $2.09 to $2.23. As for the consensus, it was for revenues of $6 billion and earnings of $1.82 per share.
In other words, MU is running on cylinders. Consider that Q4 broke records for gross margins, operating income and free cash flows.
Awesome, right? Definitely. Yet there remain many skeptics. The memory business has a long history of boom-and-bust cycles. To put things into perspective, MU stock went from $36 in late 2014 and $9.56 in 2016. Yes, the swings can be stomach churning.
However, I think there are some important factors to keep in mind for why we will not see a downturn anytime soon. One reason is that the industry is consolidated, with only a handful of players. They all realize that getting too aggressive on adding capacity will likely result in a major drop in margins.
But another factor (which is perhaps the most important for MU stock) is that the demand for memory chips will probably remain strong for years to come.
Just look at the cloud business. The industry is seeing strong growth as companies like Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), SAP SE (ADR)(NYSE:SAP) and Oracle Corporation (NYSE:ORCL) invest aggressively in core infrastructure systems, like high-end memory. According to research from Gartner, the cloud market is forecasted to grow at an average compound annual rate of 18% to $383.5 billion by 2020.
Thus, for the latest quarter of MU, the key growth driver for the Compute and Networking Business Unit was, yes, the cloud. Revenues more than doubled to $2.8 billion and the operating income jumped by 56% to $1.6 billion. A key has been heavy investments in R&D, such as with 20-nanometer DRAM production and 1X DRAMs.
But of course, there is much more to MU than the cloud. For the most part, the company is positioned to benefit from various large market opportunities, like next-generation smartphones, self-driving cars, AI (Artificial Intelligence) and AR (Augmented Reality).
In light of all this, it should be no surprise that MU is investing heavily in its growth plan. The forecast is for capital expenditures to hit $7.5 billion in 2018, up from $6 billion in the current year.
Bottom Line On The MU Stock Price
During the past few years, MU has done a great job in moving away from the PC business. The diversification should help mute the volatility in the business but also position the company for sustainable growth.
Note that this is the take of former founder of Sun Microsystems, Bill Joy. As a partner at the Water Street Capital hedge fund, he has invested about a quarter of the equity assets into MU stock. Joy has noted: “With the DRAM industry untethered from its highly cyclical past, we believe chip prices and company earnings are going to be and remain higher for longer than investors currently expect.”
Oh, and something else: MU stock is still fairly cheap, even with the run-up in the shares. Keep in mind that the forward price-to-earnings ratio is about 6X. Essentially, the valuation is not reflecting little growth – which really does seem way off base.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
