When it comes to memory chip giant Micron (NASDAQ:MU), it’s all about supply and demand. That is, when supply is low and demand is high in the company’s core DRAM and NAND markets — which usually happens during good economic times — Micron’s revenues, margins, profits and stock price all march higher. Conversely, when supply is high and demand is low — usually during bad economic times — Micron’s revenue, margins, profits and stock price all tumble.
Investors need look no further than a chart of MU stock over the past five years for confirmation of this trend.
See that big drop in MU stock from late 2014 to early 2016? That was driven by a global economic slowdown in 2015, which weighed on memory market demand. Also, see the big rally in MU stock from early 2016 to early 2018? That rally was driven by a global economic upturn in the wake of corporate tax cuts, which boosted memory market demand and propelled Micron’s revenues and profits meaningfully higher.
Similarly, the selloff in MU stock from early 2018 to mid-2019 can be attributed to a global synchronized economic slowdown at the hands of the U.S.-China trade war, while the rebound in MU stock since mid-2019 can be chalked up to that slowdown showing signs of easing.
Recognize the trend? When the global economy is doing well, memory market demand is solid, and MU stock marches higher.
Fortunately for MU bulls, the global economy projects to rebound in a big way in 2020. This will lead to a similar rebound in memory market demand, which will propel Micron’s revenues, profits and share price all higher over the next 12 months.
Micron’s Fundamentals Are Rebounding
Micron’s core fundamentals are improving in a big way and project to keep improving for the foreseeable future.
Long story short, the global economy has ebbed and flowed with the U.S.-China trade war over the past two years. As it should. These are the two biggest and most important economies in the world. The more they fight each other on trade, the more the whole global economy gets on edge. Corporations everywhere pull back spending. Economic activity slows. Consumers start to hesitate.
From January 2018 to August 2019, all the U.S.-China trade war did was heat up. This caused memory market demand to dry up, since businesses were cutting back on capital spending. This killed Micron’s revenues and profits. But, since August 2019, global trade tensions have significantly eased amid signs that both the U.S. and China are willing to sign a series of “mini” trade deals, and will stop upping the ante on one another.
As trade tensions have cooled, economic activity has picked back up, especially in the semiconductor market, where — following a multi-quarter decline — sales have increased for three straight months, to cap off a third quarter wherein sales rose an impressive 8.2% quarter-over-quarter. Importantly, this rebound in semi market demand has directly correlated to a rebound in MU stock.
Trade tensions will continue to cool into 2020. On one end, President Donald Trump doesn’t want to up the trade war ante in an election year. On the other end, China doesn’t want to up the trade war ante just as its economy is starting to find its footing again. So neither side wants to up the trade war ante. Neither will. Trade tensions will keep cooling. Global economic confidence will keep rebounding, as will memory market demand.
Micron Stock Has Tons of Runway
Considering that the company’s core supply-demand fundamentals are improving, Micron stock has plenty of runway to move higher so long as these improvements persist.
Here’s the logic. Micron’s revenues will stabilize in fiscal 2020 thanks to easing trade tensions. In 2021 and 2022, revenues will start marching higher again as 5G smartphone and internet-of-things catalysts enter the fold. Gross margins will improve over this stretch, thanks to favorable pricing trends on the back of renewed demand. Operating expense rates will fall thanks to renewed big revenue growth. Profits will surge higher from today’s depressed base.
Current Street estimates call for earnings per share to hit $2.60 in fiscal 2020, before rebounding to $5.30 in fiscal 2021 and $7.50 in fiscal 2022. My modeling suggests that those numbers are very doable, assuming Micron returns to a more normal growth trend post 2020.
Micron historically trades anywhere between 7-times and 13-times forward earnings. Split the difference and assume MU stock fetches a meager 10-times forward earnings multiple in fiscal 2021. On $7.50 in projected EPS for fiscal 2022, that equates to a fiscal 2021 price target for MU stock of $75.
Micron stock trades hands around $45 today. Thus, assuming that the company’s fundamentals do improve with easing trade tensions, MU stock could surge by more than 65% over the next few quarters.
Bottom Line on MU Stock
It increasingly appears that Micron is in the first few innings of a rebound which could carry MU stock to substantially higher prices.
The investment implication, then, is simple. Buy into this rebound. Wait for trade tensions to keep easing. Let memory market demand come back into the picture, and let that renewed demand drive MU stock higher.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
