It’s been a couple of weeks since I suggested Micron Technology, Inc. (NASDAQ:MU) would hit $36 within the next 12 months. Hardly an original idea, I got the 12-month price target from Morgan Stanley (NYSE:MS) analyst Joseph Moore.
As we get closer to Micron announcing its Q4 2017 earnings, I can’t help but think a $36 target for MU stock is incredibly conservative given it’s expected to deliver $1.83 in earnings per share and $5.94 billion in revenue, both significantly better than a year ago.
Solid Earnings at Micron
MU stock closed September 15 trading at $34.65, just 3.8% shy of $36 and 5.3% of its five-year high. Although its positive earnings surprises have gotten smaller in recent quarters, the $1.85 whisper number suggests it will beat once more albeit at the narrowest of margins.
Turning our attention to 2018, the 30 analysts who cover MU stock, 27 have a “buy” or “strong buy” recommendation and an average 12-month price target of $43.72, well above $36.
These same analysts see Micro generating earnings per share of $6.25 from $22.8 billion in revenue. That’s 32.4% and 13.4% higher than in 2017. At $34.65, MU stock is trading at 5.5 times its 2018 earnings.
With Micron’s margins as good as they’ve ever been, now is not the time for shareholders to lose their nerve.
Time to Think Bigger
InvestorPlace’s Richard Saintvilus beat me to the punch September 14 writing that he thought MU would hit $40 by September 2018.
“Micron stock, which has surged almost 50% year to date, is not the bargain it was back in February when I first recommended the shares at $23,” concluded Saintvilus. “But the company is operating in a market where demand for DRAM chips will continue to grow. But with some patience, MU stock will reach $40 by this time next year, delivering 23% returns.”
Saintvilus based his positive assessment of Micron’s future stock price on stronger sequential gross margins combined with the company’s moves to limit its exposure to commoditized memory.
So, if he’s right, which I believe he is, perhaps both of us are being far too conservative in our assessment of how far MU stock can run over the next year?
$36 Will Soon Be in Rearview Mirror
Maybe $50 is the new $36, not $40, as we’ve both suggested. Maybe MU longs need to think bigger. Just because it’s up 58% year to date through September 15 does not mean it can’t go 58% higher over the next 6-12 months. Past performance, as the saying goes, does not predict future returns. That, of course, cuts both ways.
Let’s assume for a moment that it did get to $50 on September 18, 2018.
If it meets its 2018 EPS estimate of $6.25 per share, it would still be trading at eight times earnings. According to the Wall Street Journal, analysts estimate that MU’s 2019 earnings per share will be almost a buck lower at $5.21. However, that’s still only 9.6 times forward 2019 earnings.
Bottom Line on MU Stock
The only way I see Micron’s stock retreating is if one of two things happens.
Either the stock runs past $40 before its September 26 earnings release or it delivers less than $1.83 per share. If neither of those happen it would appear that $40 is a done deal by the end of 2017.
So, the question isn’t whether you should buy MU stock, the question is how much?
If it were my call and I had $5,000 to invest, I’d buy half now and half after earnings, regardless of whether it’s up or down on the news.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
