There’s a case for caution when it comes to Micron Technology, Inc. (NASDAQ:MU). Micron Technology news looks nothing but good — maybe too good. The MU stock price has now has doubled year-to-date. DRAM and NAND pricing continues to improve, with supply looking tight for at least several quarters to come.
But, of course, we’ve been here before. Between early 2013 and late 2014, MU stock went from under $5 to over $35. The same strength in pricing was seen, allowing Micron to reverse from losses and negative free cash flow to significant profits. In a little over a year, MU was at $10.
Memory pricing is hugely cyclical, which still clouds all the good news coming from Micron at the moment. That’s a key reason why the MU stock price is trading at just 5.9 times fiscal year 2018 (ending August) earnings-per-share estimates. Indeed, earlier this month, Ian Bezek did a nice job of laying out the case for taking profits in Micron stock.
But I argued last month that investors should let it ride with Micron stock, and even after another 10% gain, I’m not ready to back off the bull case here. Technically, and fundamentally, I think MU stock still has room to run.
Is Micron Technology News Too Good?
Again, all the Micron Technology news is positive at the moment. Fiscal Q4 earnings in late September were a blowout. Adjusted EPS went from a 1-cent loss in Q4 FY16 to a $2.02 profit a year later.
The MU stock price got another boost late last month, when earnings from Samsung Electronic (OTCMKTS:SSNLF) seemed to signal that both NAND and DRAM pricing would stay elevated for the near future. It’s worth remembering that it was Samsung whose capacity expansion kicked off the last downturn in pricing — but with its focus elsewhere, there’s more reason to see supply staying tight at least well into 2018.
Even an equity offering seems to have worked out well for Micron, despite an initial 5% sell-off on the news. The company announced plans last month to retire $2.25 billion in debt. The offering will hit FY18 EPS modestly, but it also de-risks Micron, giving the company more flexibility during the next downcycle.
Investors initially seemed worried that Micron management itself saw the Micron stock price as too high — and was taking the opportunity to cash out as a result. Those fears apparently have faded, however, as MU has resumed its upward trend.
How It Can Go Wrong
With the MU stock price at a 16-year high, it’s worth considering what could go wrong. Obviously, pricing is the biggest factor. Samsung’s capital expenditure (capex) is expected to rise in 2018, with much of the spend aimed at memory chip production. And the reliance of memory on declining PC sales remains a concern as well.
But both Dell Technologies Inc (NASDAQ:DVMT) and HP Inc (NYSE:HPQ) have seen their shares rise of late, as that market has held up better than many feared. Intel Corporation (NASDAQ:INTC) stock has soared of late as well, though some of that optimism has from data center efforts.
Meanwhile, analysts predict $7.72 in FY18 EPS and suggest a 5.9 forward multiple for MU. Even assuming those earnings are a peak — and those same analysts are predicting a modest decline in FY19 — a modest drop going forward is priced in. If current trends hold, Micron still has more upside.
And there’s plenty of reason to see these current trends holding. The industry has been through two major downcycles since the financial crisis; one would think the major players have learned something from the past. Micron has said the next downcycle won’t be nearly as painful as the last one — during which time Micron burned $2 billion in cash — and the debt paydown further lessens downside risk. PCs are healthier than expected, and memory usage in data center and other applications provides needed diversification.
More simply, the lesson of the chip space of late has been that it’s simply not worth fighting the trend (Nvidia Corporation (NASDAQ:NVDA) is the best example). And that holds true for Micron stock at the moment.
There’s been no Micron Technology news to suggest a change in trend. The MU stock price remains cheap. And both competitors and customers are cooperating at the moment.
It’s a great combination for Micron. And with a forward price-earnings ratio of 6, it’s easy to stay bullish on MU stock.
As of this writing, Vince Martin has no positions in any securities mentioned.