Now Is the Time to Load Up on Micron Stock

Micron stock - Now Is the Time to Load Up on Micron Stock

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Chipmaker Micron (NASDAQ:MU) reported third quarter earnings recently, and everything from the numbers to the stock price reaction was exactly as I expected.

It was yet another double-beat-and-raise quarter with huge revenue growth, huge margin expansion and huge profit growth. The bulls clapped. Analysts raised their price targets.

And yet, despite all that, Micron stock is up only 2% as of this writing, and still well off its May highs of $64 and up.

This isn’t terribly surprising. Micron stock never does much after earnings. Normally, even great numbers cause this stock to drop. And when it does rally, the rallies are relatively small in the big picture.

Instead, the big moves in Micron stock happen between earnings reports. And considering Micron’s Q3 report was really good, like many of the reports before it, now looks like the time to load up on Micron stock. I see clear runway to $70 by the end of the year.

Here’s a deeper look.

Micron’s Strong Quarter Affirms Bull Thesis

Micron’s quarter was very, very good and exactly what the bulls needed to support the long-term bull thesis.

Revenue growth was a whopping 40%, headlined by 56% growth in the DRAM market and dragged by not surprisingly sluggish growth of 14% in the NAND market.

Gross margins expanded by roughly 13%, underscoring that the memory chip pricing environment remains exceptionally favorable. Operating margins expanded by more than 14%, illustrating management’s ability to lever expenses in the midst of huge revenue growth.

The party isn’t expected to stop next quarter, either. Management is guiding for over 30% revenue growth, over 9% of gross margin expansion, and over 60% profit growth.

In other words, the good times keep rolling.

And they will keep rolling into the foreseeable future. Just at a less robust rate.

By now, it is common knowledge that this year is a near-term mountain top, and that memory chip supply ramp in 2019 will create pricing headwinds that will inevitably weigh on margins. Margin erosion will happen quickly, as it always does in the semi-conductor market, and profits will go down.

But the demand backdrop will also remain strong, thanks mostly to cloud computing, which has been and will remain the big driver of outsized memory chip demand. This still-healthy demand backdrop will ensure that regardless of supply ramp, the party will go on for Micron stock.

Micron Stock Has Runway to $70

If you’re surprised that Micron stock isn’t jumping up 10% or more on robust third quarter numbers, don’t be. Micron stock never does that. Instead, you should be surprised that it is rising at all.

Normally, the market perceives Micron earnings as “Oh, just another great report before the inevitable collapse,” and the stock sells off on good numbers.

But not this time. And that is a good thing.

It seems that Mr. Market is finally giving the bulls some credit. Micron’s big run propelled by demand tailwinds in cloud computing, AI and automation has been so big and lasted so long that it is tough to ignore at this point. Indeed, it is tough to label the Q3 report and Q4 guide as “just more great numbers before the collapse.”

Therefore, I think the thesis that Micron earnings have longevity and staying power through robust demand tailwinds despite 2019 supply ramp is gaining momentum. That thesis should give bulls control into the end of fiscal 2018.

As such, by the time Q4 rolls around in a few months, I think Micron stock could rally to $70.

Normally, during supply ramps, MU’s peak-to-trough earnings decline is $4 per share in magnitude and lasts two years. Earnings this year should shake out around $12 per share. A $4 collapse over the next two years implies an earnings bottom of $8 per share by fiscal 2020.

A historically normal 9.7-times forward multiple on $8 implies a 2019 end-price target of $77.60. Discounted back by 10% per year, that equates to a 2018 end-price target of just over $70.

Bottom Line on MU Stock

Micron stock almost never reacts positively to even the best earnings reports, so a positive move in response to the Q3 report is a sign that times are changing and that bulls are in control.

With the bulls in control, Micron stock has a clear runway to $70 before the next earnings report rolls around. I think that means that now is a good time to buy shares.

As of this writing, Luke Lango was long MU.

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