Here’s Why the Micron Technology, Inc. Stock Rally Is Legit

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MU stock - Here’s Why the Micron Technology, Inc. Stock Rally Is Legit

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Sometimes, it’s a bad call to chase a rally, but in the case of memory chip maker Micron Technology, Inc. (NASDAQ:MU), the upward momentum looks set to continue. After wading through a rocky month in April, MU stock has seen its share price rocket 25% higher in May, as investors piled back into the tech company.

Micron revealed a rosy forecast for the remainder of the year at its annual Analyst and Investor Event this month, leading to renewed optimism among traders. Sure, there are bound to be obstacles for MU, but the firm looks well-suited to deal with them effectively, making the company a top pick in the memory space.

The Memory Game

As technologies like autonomous driving and the Internet of Things gain traction, memory requirements will also expand exponentially. In order for cloud computing and AI companies to gather and process the data they need, components capable of keeping up with innovation, like memory that’s larger and faster than ever before, will be in high demand — and that’s where MU excels.

Micron essentially offers three different types of memory — NAND flash producers, DRAM and memory technology called 3D Xpoint, which it produces in partnership with Intel Corporation (NASDAQ:INTC). DRAM is where Micron makes the majority of its money — it’s one of only 3 DRAM manufacturers worldwide and more than 70% of the firm’s revenue is dependent on the technology. 

Right now, there’s a massive need for DRAM memory, because everything from cloud computing data centers to cryptocurrencies are demanding the technology. That’s been a big help for memory stocks like MU, but investors have been careful not to become overly optimistic, because the industry has historically been extremely cyclical — meaning there’s going to be a drop coming soon.

That has kept MU stock’s rally from getting out of hand — which, depending on where you stand, could make for a good reason to chase the gains and buy Micron now despite its impressive May performance. 

Will Demand Continue?

Micron’s Analyst and Investor Event earlier this month was chock-full of good news. The company announced that it is planning to carry out a share-buyback program and management upped its earnings-per-share guidance for the current quarter. CEO Sanjay Mehrotra also attempted to quash concerns about the dreaded downturn in the memory space by laying out his expectations for the industry, leaving investors firmly divided into two camps — those who believe him and those who don’t.

The bears say the cyclical nature of the memory business isn’t dead and that when demand starts to taper, we’ll see MU’s margins crumble and the rally will all but disappear.

However Mehrotra and the bulls believe technological innovation over the next few years will keep prices elevated, because memory needs are going to continue to rise alongside advancements in technology. Mehrotra pointed out that DRAM is expected to see compound annual growth of 20% over the next four years — demand that will be difficult to meet. That should keep prices supported and margins intact, at least for the foreseeable future.

Perhaps Mehrotra is being overly optimistic, but when you look at what’s to come with tech like mobile, data centers, cloud computing and especially the automotive industry, it’s hard to imagine that demand for better, faster memory components will decrease.

Plus, Micron is well positioned as a memory provider. Not only does the company have a diversified product range — offering both DRAM and NAND memory technology — but the company has also remained a step above its competitors with some of the fastest and most desirable DRAM products on the market.

MU is the only player in the memory space to create chips that offer bandwidth speeds of more than 800 gigabytes per second and the company’s ability to lower prices for both DRAM and NAND has led to impressive customer retention. 86% of Micron’s customers say it is their number 1 or 2 memory supplier — a marked increase from just 44% two years ago. 

The Bottom Line on MU Stock

MU stock has seen exponential growth over the past year, but I believe those gains are set to keep on coming. The firm is well-positioned to benefit from improvements in technology and, because of those improvements, I’d venture to guess that the cyclical nature of the memory industry will be put on hold at least for the next few years.

MU stock looks likely to make its way toward $90 per share over the next 6 months, making now a great time to get on board.

As of this writing Laura Hoy did not hold a position in any of the aforementioned securities. 

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/why-micron-technology-mu-stock-rally-legit/.

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