Chip maker Micron Technology, Inc. (NASDAQ:MU) has pulled off a blistering performance this year, with its shares doubling. The return has exceeded most of the other top tech operators like Facebook Inc (NASDAQ:FB), Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN). But maybe the MU stock price has gotten ahead of itself? Perhaps now it is time to hold off on buying?
Well, for the most part, it is understandable that there should be trepidation. Let’s face it, the history of the MU stock price has seen quite a bit of volatility. Back in early 2016, the shares fell below $10.
Yet despite this, I still think the bull case remains intact. And to see why, let’s take a look at three major factors.
MU Stock Advantage #1: Secular Trends
It does appear that MU’s business is undergoing fundamental changes. First of all, the global industry is essentially an oligopoly. In other words, the players have remained disciplined in terms of adding new capacity.
Next, it is important to keep in mind that the chip industry is benefiting from various megatrends, such as mobile, cloud computing and AI (artificial intelligence). All these technologies require high-end memory chips.
For example, the founder of Sun Microsystems, Bill Joy. has recently 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.” As a result, his hedge fund (Water Street) has invested a quarter of its equity assets into MU stock.
MU Stock Advantage #2: Innovation
Over the years, Micron has invested aggressively in R&D and acquisitions. Because of this, the company has continued to be an innovator in its industry. But MU has also been restrained with other expenses and has focused on a low-cost pricing strategy to gain more scale.
Here are just some of the innovations:
- Graphics: MU continues to gain traction in the gaming industry with its GDDR5 and GDDR5X offerings. But there are also applications in the fast-growing categories of analytics and in-memory databases.
- Mobile: In the latest quarter, there was roughly a doubling in revenues for mobile NAND and eMCP solutions. Some of the drivers include the demand for smartphones that provide advanced video and augmented reality.
- Storage: Revenues in this business segment increased by 71% in the most recent quarter. At the core of the strong demand is the SSD product portfolio.
- Embedded Systems: There has been robust growth for 20-nanometer DDR and LPDDR technologies because of the automotive and IoT (Internet of Things) markets.
All in all, Micron has been able to diversify its technologies across key growth markets. More importantly, the technologies are standouts in their categories. According to InvestorPlace writer Josh Enomoto: “MU has been steadily gaining market share over the past few quarters. Subsequently, it’s also chipping away at Samsung Electronic (OTCMKTS:SSNLF) dominance, giving Micron stock investors more reason to cheer.”
MU Stock Advantage #3: Valuation and Growth
Even with the run-up in MU stock, the valuation remains fairly cheap. Consider that the forward price-to-earnings ratio is only about 6.6X. Perhaps this is why notable value investors have been buying up shares in MU stock, such as Greenlight Capital’s David Einhorn.
But the multiple is even more compelling when you look at the growth profile. For example, in the latest quarter, the revenues soared by 91% to $6.14 billion, and the cash flows from operations came to a hefty $8.15 billion.
So if the growth rate continues — which seems like a good bet given the secular trends — then there should be multiple expansion, further driving the stock price.
Tom Taulli is 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.
