A quick look at the fourth-quarter earnings statement of Micron Technology, Inc. (NASDAQ:MU) paints a picture of record-setting profitability — a big reason MU stock is up 350% since the beginning of 2016.
The question on everyone’s mind is: Can it continue?
Probably not, given that the semiconductor industry is known for sporadic revenues and earnings. But rather than fear peak earnings, investors ought to embrace the possibilities.
Here’s why…
What If This Is Only the Beginning?
Micron’s operating earnings in fiscal 2017 were $5.9 billion from $20.3 billion in revenue — both all-time company records. Sequentially, Micron’s Q4 2017 operating income increased 22.9% on a non-GAAP basis to $2.5 billion or 41.5% of revenue, 430 basis points higher than the previous quarter.
Since the earnings release Sept. 27, MU stock is up 38% in less than two months. Next stop for the MU stock price is $50 — and probably higher, as momentum just keeps on doing its thing.
Is $100 possible by the end of 2018?
Well, not if we’re at peak earnings, that place where business can’t possibly get any better. In any other industry, if a company were delivering this kind of growth, investors would be saying, “heck, yes” and buying more MU stock.
But Micron is at the mercy of big customers like Intel Corporation (NASDAQ:INTC), which accounted for 9% of overall revenue in 2017 and 14% in 2016. As Intel goes, to a certain extent, Micron goes.
Peak Earnings Cometh
InvestorPlace’s Luke Lango mentioned peak earnings in his Nov. 16 article about Micron.
“Peak earnings are just around the corner, so that is something to be aware of. But due to chip complexity and robust demand, supply increases won’t cause an earnings wipe-out,” Lango wrote. “Earnings will come down, but the declines should be moderate.
In other words, Micron’s unlikely to set record earnings in 2018, but they’ll still be good.
Looking at Micron’s 10-K, combined with CEO Sanjay Mehrotra’s comments in the company’s Q4 2017 press release, I’m not so certain the good times are over from an earnings perspective.
“Micron delivered exceptional fourth quarter and fiscal year results, reflecting solid execution and robust demand for our memory and storage solutions,” said Mehrotra. “We expect healthy industry fundamentals to continue into 2018, supported by increasingly diverse end markets and applications.”
Artificial Intelligence, the Cloud and Augmented Reality
These three segments of the tech industry continue to grow like wildfire. In 2017, due to the growth in the cloud storage market — estimated to be $92 billion by 2022 from $25 billion in 2017 — Micron’s top two revenue generators (CNBU and SBU) delivered $4.3 billion in operating income or 73% of its overall profits.
And that doesn’t include the growth from products related to artificial intelligence and augmented reality.
“We believe this global memory chip shortage is set to continue until the end of 2018, at the least,” stated Cyrus Mewawalla, the managing director of CM Research, in a recent TipRanks commentary by Harriet Lefton, who added, “[Mewawalla] says demand for DRAM chips and NAND flash chips comes from ‘new and powerful technology cycles’ such as artificial intelligence and augmented reality.”
Micron might not have even scratched the surface when it comes to these two growing segments of the tech industry.
Bottom Line on MU Stock
Can earnings get worse? They can. However, if the three areas above continue to exceed investor expectations, peak earnings might turn out to be a myth.
At the end of 2018, it wouldn’t surprise me if Micron’s 2020 earnings estimates aren’t higher than the current $6.20 a share.
Can MU stock hit $100 by the end of 2018? It can… but only if the peak earnings reality doesn’t rear its ugly head.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
