As broader markets remain in an uptrend, it is increasingly difficult to pick stocks that are trading at attractive valuations. Micron Technologies (NASDAQ:MU) is attractive from this perspective with the stock trading at a forward price earnings ratio of 24.8. However, my “bullish” view on MU stock is not just limited to valuations. There are green shoots in the industry that can make the next 18-24 months rewarding for Micron stock investors.
Before looking at the industry and company-specific factors, it’s worth mentioning that Micron has significant exposure to China. Phase one of the trade deal is therefore an upside catalyst.
Micron has already received supply licenses for Huawei. This will have a positive impact on revenue potentially towards the end of 2020 or in 2021. Therefore, trade negotiations moving in the right direction in 2020 is critical for MU stock upside.
Positive Industry Outlook
I want to start my discussion with some perspective on the industry. According to TrendForce, the decline in DRAM contract prices got less intense in Q4 2019. It is further expected that DRAM prices stabilize and recover in 2020. Therefore, the worst might be over and it’s likely that margin improvement is seen in the second half of 2020. This is one key factor that should power Micron stock higher.
In addition, it is expected that graphics DRAM prices will witness a sharp uptrend in 2020. Samsung (OTCMKTS:SSNLF) remains the leader in the graphics DRAM market. SK Hynix and Micron have a similar market share. However, Micron is ahead of SK Hynix when it comes to development of GDDR6 products. This will give an edge to Micron in 2020 and beyond.
I started my discussion with DRAM since Micron generated 67% revenue from that technology in the first quarter of 2020. Coming to NAND, it is expected that flash prices will rise in 2020 with demand coming from the server market.
Clearly, there are positive industry tailwinds and these are likely to translate into growth acceleration in the next 18-24 months.
AI Processing Inroads
Micron is making inroads in the high potential artificial intelligence industry and this could be a long-term game changer. The company recently acquired Fwdnxt, which specializes in AI hardware and software.
With the acquisition of Fwdnxt, the company has launched the “Micron Deep Learning Accelerator (DLA).” The DLA is capable of consuming massive data and returning insights. Oregon Health & Science University is using the DLA for new insights for treating cancer.
This acquisition might also hint at Micron’s entry into manufacture of AI-based memory chips. Therefore, in the coming years, the chip maker might be competing with companies like Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA).
Besides potential entry into manufacture of AI-based chips, the development of AI will also boost demand for DRAM over the next decade. According to Micron SEO Sanjay Mehrota, AI servers need six times more DRAM than servers for traditional workloads.
It’s not surprising that AI infrastructure market is expected to grow at a CAGR of 23.1% between 2019 and 2025. Micron stands to benefit from this trend.
Final Thoughts on Micron Stock
As of Q1 2020, Micron reported cash and equivalents of $8.3 billion. In addition, the company reported operating cash flow of $2 billion for the quarter. This implies an annualized OCF of $8.0 billion. Micron is therefore internally funded with $7 billion-$8 billion in expected capital expenditure for 2020. Further, a robust cash buffer allows shareholder value creation through repurchases.
In conclusion, the “bullish” view on Micron stock is backed by positive trade deal developments coupled with industry recovery. Specific to Micron, the company stands to benefit from significantly higher memory requirement in the coming years due to AI and 5G.
Micron stock has already been discounting these positives with a rally of 67% in the last one year. However, considering forward PE valuations, I believe that there is more juice in the rally.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
