The strong performance in semiconductor stocks is lifting all boats. But for Micron Technology, Inc. (NASDAQ:MU), whose valuations lagged the market for months, the breakout is hardly surprising. After the MU stock price rallied another 3.7% on Tuesday, Nov. 21, chances are good that the stock will keep moving well beyond $50 a share.
Its forward P/E of 7.3 times, low debt, and EPS growth are only numbers that would attract value investors. Unrelenting strong demand for both memory and flash storage will justify a multiple expansion of MU stock.
Big Hedge Fund Buys MU Stock
David Tepper, who manages Appaloosa, disclosed a massive increase in his MU stock holding. Per the 13F filing, Appaloosa now holds 8.44 million shares, up from 1.25 million. It is also worth mentioning that the fund holds Alibaba Group Holding Ltd (NYSE:BABA) and Facebook Inc (NASDAQ:FB).
Micron gives the fund exposure outside of software and electronic commerce. The rising semiconductor market, lifted by higher hardware pricing and strong demand, suggests Micron will hold its gains in the near term. Tepper’s nearly eight-fold increase in MU stock ownership signals his confidence in the company.
In mid-November, Micron announced it completed the flash fab expansion in Utah. It will output 3D XPoint, a non-volatile memory storage combination developed with Intel Corporation (NASDAQ:INTC). Though it will not yet add to revenue, Micron will keep defying investor expectations.
In Q4, revenue grew nicely, driven by all of its business units. In its Compute and Networking, Cloud, and Graphics segments, revenue improved. DDR4 production at 1X nm began, while the company sought qualification for TSV-stacked DDR4 products.
The Mobile unit showed even more impressive results. NAND and eMCP revenue nearly doubled from last year. Micron won its first qualification for 1X nm LPDRAM, 3D TLC eMCP and eMMC solutions.
Revenue from the Storage segment of Micron’s business rose 71% due to strong demand for SSDs. Not only are consumers buying these faster storage devices, but Enterprise customers are choosing the SATA 5100 SSD product.
Exposure to Automotive Market
Micron is not getting left out of the automotive computing market. Whereas Intel is invested in this market through its Mobileye unit, and Ambarella Inc (NASDAQ:AMBA) is developing CV1, Micron is ramping up 20 nm DDR and LPDDR. It also started sampling 1X nm DRAM in Q4.
Outlook for Micron
Micron expects the undersupply of DRAM and NAND will lead to positive pricing and solid demand for 2017. It forecasts DRAM supply will grow by around 20%, and NAND supply will grow in the high 30% range.
In 2018, DRAM will continue to grow by 20%, but demand from cloud customers will keep the demand/supply balanced. This implies that investors should not expect any pricing deterioration.
Micron is more bullish on the NAND market. It forecasts supply growth of 50%. Due to unfilled demand, NAND pricing should be stable. The PC refresh from Intel and Advanced Micro Devices, Inc. (NASDAQ:AMD) will sustain demand.
In Q4, the consumer represented 40% of NAND revenue for Micron. In 2018, Micron guided capital expenditure will total $7.5 billion (give or take 5%). It will invest nearly half of the budget in DRAM memory and the other half in non-volatile memory.
Takeaway on MU Stock
As the MU stock price crosses $50 a share, investors need not sell just yet. 50 is just a number, and beneath that is an undervalued semiconductor stock whose growth prospects keep getting better.
Disclosure: Author doesn’t hold any shares in any of the companies mentioned.