Arie Goren

About the Author Arie Goren

Arie Goren is a senior global analyst at Sigma Wealth Management/ ANDBANK GROUP. He has 37 years of experience in the world financial markets specialized mostly in the American stock markets and commodities. Arie Goren has been writing many investment articles in important financial websites and financial newspapers like Seeking Alpha, Amigobulls, TalkMarkets, Born2Invest, Bizportal, Themarker, Calcalist, Globes and others. He has also developed very successful strategies for creating winning portfolios according to specific formulas. In January 2015, he was ranked among the world’s top 10 financial bloggers according to TipRanks, which holds financial experts accountable for their recommendations by disclosing their stock ratings since 2009.

Micron Technology Can Continue To Rally Due To Better Market Conditions


Micron Technology, Inc. (NASDAQ:MU) has done very well lately, and its stock has outperformed the market by a significant margin. In fact, since the beginning of 2016, MU’s stock has gained 79.9% while the S&P index has increased only 15.6% in the same period. The company is benefiting from better pricing environment due to tight supply and high demand for memory chips. As such, on March 2, at Morgan Stanley Technology, Media & Telecom Conference, Micron raised its guidance for the second quarter of fiscal 2017. According to the company, the positive momentum has continued in the second quarter. Micron now expects earnings per share of about $0.86 compared to earnings per share of about $0.63 in its previous guidance. Moreover, the company now expects gross margin of about 37.5% compared to previous guidance of about 32.5%. According to the company, in addition to better pricing environment, operational improvements that Micron has been working on have contributed to the better results.

Micron is the only American major producer of memory chips, about 60% of its revenues come from DRAM, and 31% of its revenues come from NAND flash memory. Growing use of mobile; smartphones and tablets and the increased content of DRAM in mobile devices had caused mobile DRAM revenue to increase by 20% in the last quarter of 2016. The market share of DRAM in mobile devices had reached about 44% in that quarter.

According to research companies like DRAMeXchange, it is expected that DRAM memory content for high-end smartphones will rise this year starting at 6GB. Also, it is anticipated that the content of DRAM memory in mid-range devices will increase in 2017 to the range between 3GB to 4GB. DRAMeXchange expects the memory chip industry to stay profitable in 2017, and that the growth of the annual global bit demand for mobile DRAM will be over 30% in 2017. Since DRAMeXchange is following the memory chip market thoroughly, I believe that we can rely on these figures.

The NAND flash memory market has also been strong in the fourth quarter of 2016, and NAND flash revenue increased 17.8% compared to the previous quarter. According to a report by DRAMeXchange, in the last quarter, NAND flash memories were in a significant shortage while the demand was high. As a result, the average sales prices of NAND flash products increased significantly in the last quarter. Moreover, according to the research company, the prices of NAND flash products will continue to rise in the first quarter of 2017 due to a shortage caused by the industry transition to three-dimensional NAND flash architecture design.

According to Micron, there have been very limited wafer supply additions which are not sufficient to change the supply-demand balance at least in 2017. The company sees an increase in demand of 20% to 25% in 2017, while it expects an increase in the supply of 15% to 20%. As such, we can expect a continuous good pricing environment.

All in all, as I see it, the future of Micron is bright since the need for memory chips will continue to increase even at a higher rate than the actual. There are all new applications like the internet of things and autonomous cars which use a large amount of memory chips DRAM and NAND flash as well. Also, the increased use of video content in the social networks will need more memory for the mobile devices. Furthermore, the introduction of solid state drives (SSD) at data centers due to their higher speed and better reliability will require much more NAND flash memories. Since the global wafer supply additions for the next few years is not expected to follow the increasing demand for memory chips, Micron will continue to benefit from good market conditions. All these developments should encourage Micron’s investors since higher demand, and better prices will increase its revenues and profits which will cause its shares to continue to rise

Micron Stock Performance

Since the beginning of the year, MU’s stock is up 16.2% while the S&P 500 Index has increased 5.5%, and the Nasdaq Composite Index has gained 8.6%. Moreover, since the beginning of 2012, MU’s stock has gained an astounding 305%. In this period, the S&P 500 Index has increased 87.8%, and the Nasdaq Composite Index has risen 124.3%. According to TipRanks, the average target price of the top analysts is at $29.63, representing an upside of 16.5% from its March 14 price of $25.43, however, in my opinion, shares could go higher.

MU Daily Chart

MU Weekly Chart

Charts: TradeStation Group, Inc.

What To Expect From Micron’s Earnings Report

Micron Technology is scheduled to report its second quarter fiscal 2017 financial results on Thursday, March 23, after market close. According to 17 analysts’ average estimate, Micron is expected to post a profit of $0.85 a share, a 4.5% decrease from the year-ago quarter. The highest estimate is for a profit of $0.89 a share while the lowest is for a profit of $0.70 a share. Revenue for the second quarter is expected to grow 58.5% year over year to $4.65 billion, according to 17 analysts’ average estimate. There were eight up earnings per share revisions during the last seven days and 17 up revisions in the last 30 days. Since Micron has delivered significant earnings per share surprises in twelve of its thirteen last quarters, as shown in the table below, there is a good chance that the company will beat estimates in the second quarter as well.

Conclusion

Micron will continue to benefit from favorable supply-demand balance and a continuous healthy pricing environment. The demand for memory products will continue to rise sharply as the role of memory is growing in industrial design, and the memory content in mobile devices is continuing to expand. The average target price of the top analysts is at $29.63, representing an upside of 16.5% from its March 14 price of $25.43, however, in my opinion, shares could go higher.

 

Disclosure: I am long MU stock.

 

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