Chips go through cycles, but some chip types go through super-cycles, when fundamental demand goes to levels unknown. The best-known company of this type is Nvidia Corp. (NASDAQ:NVDA), whose graphic processors can drive your car, mine your money and deliver artificial intelligence, not just play games. But there’s another company going through a super-cycle right now: Micron Technology Inc. (NASDAQ:MU).
I was pounding the table for Micron stock in October, noting that both clouds and phones prefer chip memory to disk, because it’s faster in clouds, smaller and stable in devices.
Since then, the stock is up about 20% and it seems everyone likes Micron. Some 25 of the 31 analysts following it say “buy.” Both sales and profit margins are rising — and this is not expected to change when it next reports earnings March 22, with $2.69 per share of profit on $6.79 billion of revenue expected.
Behind the Breakout
To understand the breakout, just look around you.
Your phone, your watch and, now, your PC are probably all running on memory chips. Most laptops no longer use spinning aluminum hard drives, either. They’re restricted to back-end storage, like a MyCloud at your home or office — and that’s how it will remain.
None of the hot new markets — artificial intelligence, internet-connected security cameras, or wearables — are using disk memory. It’s all chips. Chips are sturdy, chips are small and chips are cheap. Best of all, there are few suppliers, and none as focused on the niche like Micron.
It is, as a I wrote in February, Facebook Inc. (NASDAQ:FB) results for a Ford Motor Co. (NYSE:F) price, because so many past booms have ended in tears that, even now, the stock is selling at a price-to-earnings multiple under 8.
What Can Stop It?
In the past, memory booms busted because supply overwhelmed demand. Once a chip fabrication plant gets rolling, it can expand production rapidly, and Micron’s chief rivals — Samsung Electronic (OTCMKTS:SSNLF), Toshiba Corp. (OTCMKTS:TOSBF), SK Hynix Inc. (OTCMKTS:HXCSL) and Intel Corp. (NASDAQ:INTC) — have deep pockets for the next generational turn.
But now, so too does Micron. It has used the boom to build its capital structure, increasing cash to over $6 billion, cutting long-term debt to $7.66 billion. For the first time, it’s ready for the next bust, and the next huge capital injection needed for next-generation fabrication, in line with Moore’s Second Law (as chip complexity increases, the cost of the manufacturing gear rises).
Bret Kenwell called $47 per share an important technical level in February and Micron stock broke right through it. The company is just getting warmed up, as Luke Lango writes, its biggest problem being choosing who it wants to supply rather than finding customers.
CEO Sanjay Mehotra, formerly with Sandisk (now part of Western Digital Corp. (NYSE:WDC), knows this business inside-out, and went after maximum profit when he dumped the old Lexar line in June for higher-margin work.
The Bottom Line on Micron Stock
Micron stock is being mentioned alongside Netflix Inc. (NASDAQ:NFLX) as a must have. Every dip is being bought. The company is encroaching ever-further into markets formerly occupied by disk memory and raising its revenue forecasts.
The darkest cloud is that Intel, which blew up its NAND chip partnership with Micron in January, is now working with China, shipping 3D memory wafers with circuits 96-deep.
Some bears are going to worry, but no one is afraid of Intel any more. Micron remains the play.
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 danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in F.
