The boom-bust cycle of Micron Technology Inc. (NASDAQ:MU), the memory chip maker, is so ingrained that it’s practically a self-fulfilling prophecy. Why else would celebrity analyst Jim Cramer be warning investors away from MU stock, despite the fact that its price-to-earnings ratio of 7 is lower than even that of General Motors Corp. (NYSE:GM)?
This is true even after a spectacular run-up that has seen MU stock more than double in value over the last year, with analysts expecting the good times to continue when the company next reports earnings in March, with profits of $2.53 per share on revenue of $6.79 billion forecast.
There is reason to believe that the past chip busts are not the inevitable short-term future. Technology choices do change with time, and there is, this time, a real tailwind behind chip-based memory.
What Intel Knows
Bears may tell you that Intel’s split means it’s gunning for Micron, just like the Chinese and Koreans are gunning for Micron. They are all gunning for Micron. But the nature of technology has changed in our time, and these waves are breaking Micron’s way.
First, look in your hand. That phone is what your PC was. That phone requires chip-based memory. Only chips provide the speed and durability phones require. Disks have moving parts, and magnetic disks can be wiped out by magnets.
This didn’t matter much when the price-performance of disk was so superior to that of chips, but now chips’ technical advantages offset that, and the difference isn’t material anyway. This means that even cloud data centers are starting to replace disks with chips, for durability — first, in the front of the process where access speeds matter and, increasingly, in deep storage.
Just compare the chart of MU stock with the charts of its disk-based competitors, Western Digital Corp. (NASDAQ:WDC) and Seagate Technology plc (NASDAQ:STX). Both Western Digital and Seagate have been rushing into chip-based subsystems as fast as they can, but their stocks have barely moved, despite dividends that, in Seagate’s case, bring its yield to 5.5% — that’s Ford Motor Co. (NYSE:F) country!
Meanwhile, MU stock just keeps rising.
Why? Growth. Neither Seagate nor Western Digital is growing by double-digits. Micron’s revenue of $6.8 billion for its most recent quarter is up 75% over the previous year’s $3.97 billion. Profitability, meanwhile, has exploded, from 16 cents per share to $2.19 per share.
How Long Will the Good Times Last?
It’s true that memory chips are a commodity product. Its true that their price performance continues to improve. It’s true that the price of Micron stock is closely tied to the price and profitability of dynamic random access memory (DRAM).
It’s unreasonable to expect the price of DRAM to stay high. But it’s unreasonable not to expect that Micron can keep increasing the capacity of its chips. Chip-based memory cards that sold for $3 per megabyte early this century are now selling for about 50 cents per Gigabyte. That’s Moore’s Law for you.
The Bottom Line on MU Stock
The replacement of disk-based memory with chip-based memory is a long-term trend, not a short-term phenomenom. Phones, watches and other modern computer forms require chip memory, and clouds are increasingly chip-memory intensive.
That’s why I can’t find any reason to disagree with Bret Kenwell when he suggests the price of Micron will soon break out above $50 per share. Buying on a price dip, as Chris Lau suggests, also makes sense here.
This boom, too, will bust, but not for quite some time yet.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in F.