There’s no denying it, 2017 was a banner year for Micron Technology, Inc. (NASDAQ:MU), and a rewarding one for MU stock holders. The MU stock price is up more than 90% since the end of 2016, and that’s with the stumble from its late-November peak.
Even more amazing? Even with the big rally, MU stock is still priced at a single-digit P/E ratio.
That valuation raises a myriad of questions. Chief among them, however, is whether or not the memory maker is going to do something amazing again in 2018 after swinging back to a profit in 2017. Analysts certainly seem to think so, even if the average investor has yet to price the stock at levels more commensurate with its peers.
Bullish Outlook Based on Proven Success
The simple version of a complicated story: Historically speaking, makers of computer memory mishandled the supply they were creating by misjudging future demand.
Throw in the fact that memory technology has changed dramatically in recent years, and it’s not terribly surprising to learn the key names in this business like Micron and Samsung Electronics Co Ltd (OTCMKTS:SSNLF) have been beleaguered.
After a handful of boom-bust cycles though, the industry seems to have a better grip on the ideal balance that keeps prices firm and stable. As Evercore ISI analyst C.J. Muse opined this week:
“Our vision continues to be that structural changes in memory demand, coupled with rising complexity in node shrinks, is leading to a new normal for DRAM (dynamic random-access memory chips) that is sustainable. And in non-volatile memory, we expect ongoing cost downs to deliver price elasticity driven demand that will sustain elevated and profitable bit growth over the next decade as SSDs (solid-state drives) continue to cannibalize HDDs (hard disk drives).”
Muse isn’t alone in his optimism. Rosenblatt analyst Hans Mosesmann also noted recently:
“We continue to view the current memory industry as the best in semiconductor history with its duration (longer) and nature (content-driven) being key drivers within a rational oligopolistic industry.”
“Specific to Micron we are encouraged by management’s very aggressive FCF deployment to de-levering activities (exit FY2018 in a net cash positive position), as this should lead to investor base diversification.”
It’s not an optimism the average investor shares about MU stock, however. The evidence? The fact that Micron shares are valued at a trailing P/E of 6.6 and a forward-looking one of 4.9. That’s cheap, and not cheap simply because of fortuitous one-time accounting benefits.
The fiscal trajectory Micron is already on makes it clear that 2018’s bullish expectations are not only plausible, but probable. The graphic below tells the tale.
The image, to be fair, assumes revenue will level off beginning immediately, with margins beginning to shrink. And, maybe that will be the outcome. Just for the record though, Micron has trounced earnings estimates for the past several quarters. That is to say, analysts have underestimated Micron for over a year.
It’s not unreasonable to suspect they, as a group, continue to do so; Mosesmann and Muse are at the more bullish end of the spectrum, realizing their doubts have been unmerited. All analysts, however, are starting to up the ante on their optimism.
So why aren’t traders pricing Micron stock in a manner that makes more and better sense, and in a way that’s consistent with how investors value other technology stocks of its ilk? Simply put, and as was noted, most investors simply don’t believe the future looks as bright as it seems. Perhaps they’re remembering the gluts the memory industry has bumped into too many times in the past.
As was also noted though, these players (and Micron in particular) have a much firmer grip on the volatile supply/demand cycle for computer memory. To that end, it’s also noteworthy that more than half of Micron’s business comes from the data center and server market. That’s a market which, unlike the PC market, is still growing like crazy.
The end result? Analysts collectively think MU stock is worth $58.79 per share, up 38% from its current price, with the analyst community deeming it slightly better than a “Buy”… a small notch towards a “Strong buy.” That bullishness is also strengthening.
Bottom Line for MU Stock
Not that analysts, individually or collectively, are always right, but this is a case where the professionals may be looking at Micron through a more level-headed lens with a better handle on where the memory market is and where it’s going. That’s information the average individual investors may struggle to acquire, or interpret.
In other words, the pros are more right about Micron here, and retail investors are errantly underestimating the company’s future.
That’s not to suggest MU stock is incapable of suffering painful selloffs in the foreseeable future. Indeed, after a 90% rally in 2017, even if it failed to price the stock at its full value shares look technically overbought and poised for a technically-driven pullback. That’s all it is (or would be) though, a short-term pullback that’s actually a long-term buying opportunity.
Micron continues to be one of the market’s best opportunities. Analysts are slowly but surely seeing the light. The stock, driven by retail investors, in time will follow that lead.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.