Memory chip giant Micron (NASDAQ:MU) reported blockbuster third quarter earnings at the end of June which both whizzed past Wall Street expectations and impressed investors, with MU stock rising 5% to near post-March highs on the news.

But does this strong quarter mean you should buy MU stock?

I’d say so.

MU stock isn’t my favorite semiconductor stock to buy at current levels. The valuation is a bit stretched on the heels of a huge, 60%+ rally since March. Shares no longer look significantly undervalued to me. Rather, they look fairly valued.

At the same time, though, the fundamentals in the memory market are dramatically improving. Thanks to catalysts like workflow digitization, new gaming consoles and 5G, Micron’s demand trends will significantly improve over the next few months. Against that backdrop, it’s easy to see Micron stock staying in rally mode.

Net net, MU stock is a good — but not great — pick here.

Here’s a deeper look.

Micron’s Earnings Were Great

There’s no other way to put it. Micron’s earnings were fabulous.

Revenues rose 14% year-over-year, marking the first time revenues grew year-over-year since the first quarter of 2019. Revenues were also up 13% quarter-over-quarter. Better yet, revenues next quarter are expected to rise more than 20% year-over-year, so you’re seeing this accelerating revenue growth narrative play out.

Gross margins clocked in at 33.2%, up four points sequentially. They are expected to rise another two points next quarter, and be up five points year-over-year — marking the first quarter of gross margin expansion since the first quarter of 2019.

Positive operating leverage returned to the Micron growth narrative. After the opex rate rose year-over-year for two straight years, the opex rate in the third quarter dropped year-over-year for the first time since 2018. The drop is expected to happen again in the fourth quarter.

Operating margins dropped just five percentage points year-over-year, the smallest decline in six quarters. Next quarter, operating margins are expected to rise seven points year-over-year.

Broadly, then, what you’re seeing with Micron is a company getting back into growth mode, with rapidly improving margins.

In the semiconductor world, that’s a winning combination.

The Fundamentals Will Only Get Better

The best part about MU stock is that the company’s fundamentals will only get better going forward.

Just look at all the demand catalysts on the horizon for this memory chip maker.

Workflows are increasingly being digitized thanks to Covid-19. Even if “normal” returns and offices re-open, business investment into cloud technology and infrastructure will only accelerate going forward. This increased cloud investment will create meaningfully large tailwinds for Micron’s data-center business.

Meanwhile, looking into the back-half of 2020, Apple (NASDAQ:AAPL) is going to launch the 5G iPhone, while Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) are going to launch their next-generation gaming platforms. Naturally, these once-in-a-decade product launches will spark supercharged demand in the smartphone and gaming end-markets — two markets from which Micron derives a bunch of revenue.

There’s also the broader 5G demand driver here, as the global roll-out of 5G over the next few quarters should dramatically advance edge computing capabilities, which should allow for the emergence of an entirely new class of IoT devices and self-driving technology. Micron also provides chips into those end-markets.

Net net, the fundamentals supporting Micron will only get better over the next few months.

As they do, revenues will keep charging higher. Gross margins will keep expanding. Opex rates will keep dropping. Operating margins will rising. Profits will keep ballooning. And MU stock will keep rallying.

But Micron Stock is Fairly Valued

The only reservation I have with MU stock here and now is with respect to valuation.

Plain and simple, Micron stock is no longer attractively undervalued.

Wall Street believes — and I agree — that Micron should be able to leverage strong 5G and cloud demand tailwinds to drive robust, 10%+ revenue growth over the next two years. During that stretch, gross margins will meaningfully expand, opex rates will meaningfully drop and profits will soar. My modeling suggests earnings per share growth from about $2.70 this year, to $6 by 2022.

MU stock historically trades at 10-times forward earnings, given its history of earnings volatility and exposure to supply-demand swings in the memory chip market.

A 10-times forward earnings multiple on $6 in 2022 projected earnings per share implies a 2021 price target for MU stock of $60. Discounted back by 10% per year, that implies a 2020 price target of about $55.

That’s only a hair above where shares trade today.

As such, I think it’s fair to say that MU stock is fairly valued.

Bottom Line on MU Stock

Micron just delivered blockbuster earnings which underscore that, despite the Covid-19 pandemic, the global semiconductor market is back.

The fundamentals supporting this market — and Micron — will only improve going forward as demand trends accelerate. Against that backdrop, it’s easy to see MU stock sustaining its current rally. But caution is warranted with respect to the valuation.