Micron Technology, Inc. (NASDAQ:MU) got off to a roaring start in 2018. But unfortunately, much of the gains have fizzled. So far, MU stock is up about 2.8%.
There are certainly notable risk factors to keep in mind. One is that MU is mired in a light fight with United Microelectronics Corp (ADR) (NYSE:UMC) regarding alleged patent infringement. While litigation is common in the tech industry, and the suits tend to last for a while, the fact is that they can be distracting and expensive.
Next, Wall Street is still skeptical about the fundamentals of MU. The company sells commodity products, and the industry is prone to boom-and-bust cycles. Back in 2016, MU stock broke below $10 because of oversupply issues.
Now while all these factors are worrisome, I still think there remains more upside for Micron. For the most part, there are few signs that the momentum will end anytime soon.
Just look at the latest earnings report. In the quarter, revenues spiked by 71% to $6.8 billion, and the net income came to $2.68 billion, or $2.19 per share. Oh, and the company also boosted its outlook.
Growth for Micron Likely to Continue
The key is that the supply-demand situation for memory chips remains quite favorable. On the demand side, there continue to be strong forces that should propel growth.
Smartphones: While the industry is mature, the devices still require advanced memory chips. This is because of features like high-end video, AR (augmented reality) and even VR (virtual reality).
But there is also a proliferation of non-smartphone devices like smart speakers, smart watches, smart appliances and so on. Yes, the Internet-of-Things (IoT) is also likely to be a big driver for demand of memory chips.
Cloud Computing: This technology represents a major transformation and has benefited operators like Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT). However, cloud computing also requires powerful memory systems, such as those that can handle massive data analytics workloads. The good news is that MU is a great fit.
Autonomous Driving: The market is still in the early stages but remains a promising long-term opportunity. According to CEO Sanjay Mehrotra:
“We secured a key design win in an important autonomous driving platform this quarter and are focused on replicating our success to retain our leading share in that market. Automotive customers are moving more rapidly to new memory technologies than they have in the past, and our announcement of the fastest 1X LPDDR4 and GDDR6 products for autonomous driving applications will ensure we continue to support this shift to leading-edge technologies.”
Bottom Line on MU Stock
Even with the advantages, MU stock is not for buy-and-hold investors. Over time, it is inevitable that more supply will come onto the market, and this will drive down revenues and margins.
Yet this may not happen until a couple years. Of course, it takes substantial investments to build facilities. And yes, the industry is highly consolidated. So capital investment decisions will likely not be taken willy-nilly.
In the meantime, MU stock is downright cheap. Consider that the forward price-to-earnings ratio is a mere 5X. By comparison, Intel Corporation (NASDAQ:INTC) is at 14X, and Seagate Technology PLC (NASDAQ:STX) trades at 12X.
What’s more, the company has focused on keeping costs low and finding ways to improve the balance sheet. During the latest quarter, there was a $2.4-billion retirement of debt.
So all in all, for investors looking for a growth play in the chip market, MU stock certainly looks attractive.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.