If the 150% run-up from Micron Technology, Inc. (NASDAQ:MU) has you nervous about stepping into a new MU stock position, you’re not alone. Likewise, if you were burned by Micron in the past, as it and other memory makers overproduced and set the stage for a price-crushing glut, your worry is entirely understandable.
This is a case, however, where the seemingly unlikely is actually rather plausible. In other words, as impossible as it may feel, there’s room and reason for the MU stock price to keep rising, allowing for — of course — the usual short-term ebb and flow all stocks go through from time to time.
And you’ve mostly got rival Samsung Electronics (OTCMKTS:SSNLF) to thank for it.
Long term investors with good memories will remember the alarming Micron Technology news headlines from 2007 and then, again, in 2012. In both cases, the advent of bigger and better computers, smartphones and operating systems called more for DRAM memory, but the industry over-responded, creating production capacity far in excess of the actual need, setting the stage for a rather dramatic plunge in memory chip prices.
Given the back-to-back nature of the two gluts, it would have been easy to see the 2016/2017 cyclical wave of new memory demand (largely driven by the launch of the Windows 10 operating system) result in the same problems created the last couple of times around. Giving credit where it’s due, however, memory companies like Samsung, Micron and K Hynix (OTCMKTS:HXSCL) have remained disciplined enough to not fall into the same trap they fell into in the past.
Fast forward to late October. That’s when Samsung made it clear that it foresees more demand than supply for NAND and DRAM chips into 2018. It’s planning on double-digit growth in shipments of both kinds of memory chips in the coming year, mirroring Micron’s outlook in its most recent quarterly report.
And for what it’s worth, nobody with anything to gain by painting a rosy picture disagrees with either company’s assessment of the future. As Stifel Nicolaus analyst Patrick Ho wrote in response to Samsung’s quarterly report and outlook:
“While there may be investor concern over the significant capex targeting memory, we believe that at this time and into at least 1H18, both memory segments (NAND and DRAM) will remain in short supply versus demand trends. In fact, for 3D NAND, we believe that despite the significant amount of industry 3D NAND capacity that is likely coming on board in 2017 and 2018, demand will continue to outweigh supply through all of 2018 and possibly through 2019 as well.”
Outlook for MU Stock
While the tailwind is strong for Micron, along with the few peers it has left, it would be naive to not at least acknowledge the huge advance the stock has made since this time last year. And the 57% rally just since its August low certainly leaves MU stock vulnerable to some profit-taking pressure. Just don’t mistake a little profit-taking for the beginning of a major pullback.
As of the latest look, the MU stock price of $43.90 translates into a trailing price-earnings ratio of 9.9 and a forward-looking P/E ratio of 6.5, the latter of which is founded on a credible, GAAP earnings outlook — no tricks or one-time benefits.
That’s dirt cheap by any sector’s standards, but incredibly cheap given the technology sector’s typical valuations.
The reason? Some, and possibly most, investors are still hesitant to believe this isn’t a repeat of 2007 and 2012.
The doubt is certainly understandable. In fact, even as Samsung was serving up an encouraging outlook, it was also disclosing it had planned to increase production capacity at its Pyeongtaek campus, which would ultimately create greater supply that could potentially whittle DRAM prices down again. To some observers, it sounded a little too much like one of the bad decisions that had been made in the past. However, after a more thorough inspection of their plans, Samsung as well as Micron appear to be exercising more discipline now than they have in the past.
That said, there is an x-factor in play that may well mean more DRAM and NABD demand than supply for quite some time. That’s the advent of cloud-computing data centers, which require more memory and storage than anyone would have thought imaginable just a few years ago.
Yet, even with the infrastructure that’s already been established, we’ve only scratched the surface of what we’re going to need once the era of the Internet of Things reaches full speed. The cloud data center market is expected to grow an average of 28.7% per year through 2023, and Micron is perfectly positioned to supply the hardware needed to make that happen.
In other words, if your gut tells you any dip from MU stock is a buying opportunity, you may want to trust your gut.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.