Micron Technology Inc. (NASDAQ:MU) did it again. Strong earnings, and a stronger forecast from CEO Sanjay Mehotra, continued to power Micron stock upward, but bears won’t let it go past the fundamentals so the memory chip maker is still a buy.
On June 20 Micron reported net income of $3.823 billion, $3.10 per share, on revenue of $7.8 billion for the quarter. This compares to earnings of $1.65 billion, $1.40 per share, and revenues of $5.56 billion a year ago.
Small wonder that the stock has doubled in price from about $30 per share to its June 22 opening price of almost $60. But you can still get it at a price to earnings multiple of 7.2.
Thank the doubters like Timothy Arcuri of UBS, who has again issued a “sell” rating on the stock, this time with a price target of $42, predicting a “big correction” in the memory market next year.
The Super Cycle
Bears continue to doubt Micron because every other boost in memory demand has eventually been met by big production increases and a crash. But as I noted in March Micron stock is riding a “super cycle” in which chip memory is replacing disk in both clients and servers, and it has become cost-efficient for cloud.
During the most recent quarter, for instance, I had a hard disk outage on my office PC and went into the memory market. A 1 terabyte disk drive was available for $70, but I went for a 500 GB chip drive instead, for about $110. The increased speed and higher reliability of chips made the higher price worth it.
The Cloud Czars are finding the same thing. Mehotra told reporters on TV, radio and online the same story he gave analysts on his conference call, that he sees robust demand for Dynamic Random Access Memory (DRAM) chips, in data centers, mobile devices, and for graphical applications.
Artificial intelligence, augmented reality, and high-resolution imaging need the speed chip memory provides.
This change in the demand equation makes writers who pound the table for the stock look like geniuses. While it is possible that a trade war will cut demand in mobile devices, cloud expansion remains mainly a U.S. market. While Micron does have operations in Taiwan and China, the bulk of its supplies Singapore and the U.S.
Execution Matters for Micron Stock
The super-cycle is not the only thing benefiting Micron stock. It also lucked out with Mehotra, who became available for the CEO chair after Sandisk, which he co-founded and ran for nearly 30 years, was sold to Western Digital Corp. (NASDAQ:WDC). It’s like getting LeBron James as a free agent with no other bidders.
Mehotra has been able to improve execution at the company and increase its share of the cloud storage market. A tailwind is nothing if you can’t take advantage of it. Analysts who have noticed Mehotra’s performance are now raising their price targets over $100 per share.
The Bottom Line on Micron Stock
If everyone is in on a stock, it can’t rise because there are no new buyers available. So long as there are skeptics, willing to make bearish pronouncements, stocks can climb the wall of worry.
That’s the story of Micron stock. It has disappointed investors in the past, usually as PC sales declined or as supplies from China and elsewhere overwhelmed it. But that’s not the case today.
Even if bad times were ahead, Mehotra now has a pristine balance sheet, with $7 billion of cash on his balance sheet, and less than $6 billion of long term debt. It’s ready for winter, but cold weather is nowhere in sight.
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 no shares in companies mentioned in this article.
