No one will deny that Micron Technology, Inc. (NASDAQ:MU) has been one of the markets’ biggest stunners. After suffering what seemed like unrecoverable losses in 2015, Micron stock enjoyed a remarkable comeback. Since mid-May 2016, shares have soared to more than 540%.
Even on a year-to-date basis, Micron stock enjoys an exceptionally robust 48% performance. Seemingly, nothing can stop Micron’s incredible run. But having said this, it’s these moments where few analysts dare take the bearish positions that we often find the unexpected reversal.
Don’t get me wrong: MU stock has been a brilliant call for several years. Fundamentally, the bullish case continues to make logical sense. Micron is a leader in advanced NAND and DRAM memory chips. As we step further into emerging technologies such as the 5G network or artificial intelligence, industry demand will inevitably increase.
However, no investment can sustain a rally indefinitely. Let’s also consider that presently, no covering analyst is pessimistic on Micron stock. Of 31 analysts, only three have a neutral position. The remainder are either strongly bullish or garden-variety bullish.
I’m not bringing up the contrarian perspective for its own sake. Our own Will Healy noted the following:
“The high prices for NAND and DRAM memory have created nervous feelings for investors, consumers, and governments alike. China has just launched a probe of MU as well as its peers in the chip space Samsung and SK Hynix Inc. The Chinese allege that these three companies, which collectively dominate the memory chip market, have conspired to fix prices.”
Additionally, technical analyst Tyler Craig warned us that certain market patterns make Micron stock susceptible to a pullback. Given its extraordinary outperformance, I’m not necessarily inclined to disagree.
MU Stock Offers “Dual Opportunities”
In my last write-up for Micron, I mentioned that its share price “will continue its stratospheric ascent.” At the time, MU stock was up nearly 21% against January’s opening price. Since my article published, MU has gained another 22%.
Therefore, you have a dual opportunity with Micron. If you bought in earlier this year and want to bank the profits, I can’t blame you. I might even say that it’s a smart strategy. You never want to get emotionally vested in a company that you end up never selling.
And if you’re a longer-term shareholder, you have an even greater incentive to sell. Unlike an Intel Corporation (NASDAQ:INTC) or a Qualcomm, Inc. (NASDAQ:QCOM), you don’t receive compensation for holding Micron. With a dividend yield of zero, Micron is purely about capital gains.
If the markets threaten those gains as Craig suggests, holding MU doesn’t make sense. Unless, that is, you believe the company has even greater upside ahead.
I do. Let me caveat my simple affirmation that shares face nearer-term volatility. Heading into this month, MU stock experienced a substantive dip. Plus, everybody has high expectations for the memory chipmaker. If its upcoming earnings report isn’t top notch, Wall Street could punish shares.
However, Micron has an undeniably bright future. It dominates NAND and DRAM production, along with SK Hynix. The other sector players, Toshiba Corp (OTCMKTS:TOSBF), Sony Corp (ADR) (NYSE:SNE), and Samsung, lag significantly.
Moreover, industry experts forecast that Micron will successfully transition to other markets besides smartphones and data-center servers. High-level partnerships, such as the NAND memory joint development program with Intel, demonstrates that Micron is well on its way. In particular, machine learning and AI initiatives appear very promising.
That $10 Billion Buyback
Another reason to ignore any nearer-term choppiness and focus on the longer-term picture is the buyback; specifically, the $10 billion worth that Micron announced last month. According to Reuters, this is the company’s biggest ever share repurchase.
One of the most important takeaways here is that management can execute this buyback without batting an eyelash. Last quarter, Micron delivered $7.35 billion in revenue, up 58% from the year-ago level. Further, it has insane profitability margins compared to the competition. In other words, the buyback is no gimmick.
Management also knows that their company is wildly undervalued. MU stock trades at under eight-times trailing earnings, and six-times forward earnings. They’re using this buyback opportunity to reabsorb equity at a discount.
If they believe so much in Micron stock, that’s good enough reason for me.
As of this writing, Josh Enomoto is long TOSBF and SNE.