Do you hear that? That’s the sound of Micron Technology, Inc. (NASDAQ:MU) stock breaking out to its highest levels since 2000. Micron stock is now at $60, and it got to this level in a hurry. Just a month ago, this was a $40 stock.
That is a massive 50% rally in a month. By comparison, the S&P 500 is up just 8% in that same time frame.
What’s driving this rally? A whole bunch of bullish analyst upgrades. And not of the minor sort. We are talking analysts doubling their price targets, pounding on the table that the favorable memory chip pricing environment MU currently finds itself in will persist into the foreseeable future.
And the upgrades have flown in over the past several days, one after the other, each giving Micron stock a seemingly brand new catalyst. Put it all together, and that is how you get a 50% rally in a major tech stock in a month.
Are these analysts right? Can MU stock continue to grind higher despite testing levels it hasn’t seen since the Dot Com Bubble?
I think so. Here’s why.
The Music Sounds So Good
My thesis on Micron stock has been consistent for the past several months. When it comes to Micron stock, it’s all about the music. So long as the music is still playing and there aren’t any signs that the music is going to stop anytime soon, this is a stock you want to own.
What exactly does this mean? In Micron’s core DRAM and NAND markets, everything is about supply and demand. Micron and competitors make a certain number of chips (supply) that go into a wide range products and locations, including smartphones, smartwatches, cloud data centers, and more (demand).
When supply outstrips demand, margins crumble and profits are meager. This is when there is no music. When demand outstrips supply, margins soar and profits are huge. This is when there is music.
The key to investing in MU stock, then, is to understand the supply/demand situation. If demand is greater than supply and will remain so into the foreseeable future, this is a stock to own.
That has been the case for a while. For the last few years, the music has been playing loud and clear. Widespread digitization, from cloud data centers to autonomous driving to smart home tech, has created robust demand for DRAM and NAND components. Meanwhile, a limited number of competitors for Micron has kept supply constrained.
This has led to a surge in Micron profits and MU stock.
But investors have been concerned that the music is going to stop playing sometime soon. After all, the semiconductor industry is notoriously cyclical, and the market can go from being under-supplied to over-supplied rather quickly. That is why investors were pricing MU stock at only 5-times forward earnings just a month ago.
The Music Will Keep Playing for Micron Stock
That sentiment, though, is starting to pivot. Now, analysts are saying that the currently favorable pricing environment in the DRAM and NAND markets will remain favorable into the foreseeable future thanks to robust demand. Investors are buying what analysts are saying, and now, MU stock is soaring.
The analysts are right on this one.
When you look at the end-markets driving DRAM and NAND demand higher, it’s easy to see that this demand won’t fall off anytime soon.
I’m talking about demand drivers like the Internet-of-Things, which is really just starting to go mainstream with smart devices popping up everywhere, or cloud data centers, which are also still in ramp mode. As the mainstream emergence of IoT produces more data, cloud storage needs for that data will only grow. Automation is essentially still in the first inning of what will be a very long growth period. And artificial intelligence is something that companies are obsessed with and investing big dollars into.
None of this is going to change anytime soon. Yes, more supply will enter the market over the next several years, and that will likely erode margins somewhat. But demand isn’t going down, so demand should remain considerably higher than supply into the foreseeable future, and earnings should remain big.
In fact, there is a reasonable argument that demand will head even higher as automation, AI, and IoT go global. From this standpoint, demand ramp might entirely offset supply ramp. In such a world, earnings could actually even go higher.
Bottom Line on Micron Stock
Regardless if earnings grow from here or simply remain near all-time highs, the current 7-times forward earnings multiple on Micron stock makes no sense.
The music is only getting louder for MU stock. Better yet, demand ramp from IoT, data centers, automation, and AI implies that the music will keep playing for several years to come.
If that is the case, then Micron stock remains too cheap at just 7-times forward earnings.
As of this writing, Luke Lango was long Micron stock.
