Micron Technology, Inc. Stock Should Pay Off Handsomely for Long-Term Investors
Semiconductor stock Micron Technology, Inc. (NASDAQ:MU) is poised for big success in 2018. While it is very unlikely that MU will be able to replicate the incredible 93% growth experienced in 2017, I would argue that it is still not too late for investors to make money from this top chip stock. And with share prices pulling back slightly from the $49.68 peak seen a couple of months ago, now is a compelling time to invest.
One reason for the dampened prices is the huge staggered share sale by Nanya Technology. Starting in December, Nanya has been selling 451,000 MU shares to repay its loans. So, while prices are still low, let’s dive in and take a closer look at just why this complex stock has the strength to overcome any expected short-term DRAM/NAND pricing headwinds:
- Micron currently earns more than 60% of its revenue from DRAM. But he market is being too bearish about an upcoming downturn in DRAM prices. MU itself- which tends to be conservative in estimate- has stated that it expects strong DRAM prices to continue in 2018 on the back of ongoing high demand levels. Indeed, Micron expects the DRAM industry’s supply to increase 20.0% in 2018.
- The company is developing new and more complex chips. In particular, it is worth drawing attention to its work in the 3D NAND area. MU recently announced that it will no longer work on this with Intel- but nonetheless the company still plans to complete development of its third-gen 3D NAND technology toward the end of the year and into 2019. Interestingly, Micron will keep developing and manufacturing 3D X-Point Technology with Intel at its Utah joint venture fab. MU describes the goal of this expanding project as an entirely new class of nonvolatile memory that can turn immense amounts of data into valuable information in real time.
- Growth drivers in end markets- Micron has exposure to a host of very promising industries including self-driving cars (which require a huge amount of data storage) as well as graphics and enterprise. Big data capabilities are increasingly fundamental to many different businesses, while AI and machine learning will also become more commonplace. Even PCs and smartphones are becoming more complex and data-thirsty. And the changing nature of these smart/memory products- both in terms of growth and in terms of increasing diversification- are likely to soften the traditional cyclical nature of the NAND/DRAM markets.
- From a financial perspective, the company appears to be in very healthy shape. From FY2013 to now, net income margin has increased by a very impressive CAGR of 23%, revenue has doubled, and free cash flow is an incredible six times higher. While it cannot be denied that this growth has been volatile, the fact remains that revenue is still up on increasing margins. It is also true that debt is up (at a CAGR of over 15%) with relatively high interest payments at 6.8%. But neither of these facts should overly trouble investors given the company’s large cash pool vs the total debt payable, and a debt payment date that is still a long way off (2022).
- The company is still trading at a very low valuation of just 3.5-4x forward P/E compared to peers. Even if the NAND/ DRAM markets were to experience a substantial downturn, Micron would still be undervalued on this calculation. Indeed, it is important to remember that MU has grown not just because of a bullish NAND/DRAM cycle but because of savvy cost cutting and product focus.
We can see from TipRanks that the Street in general has a very bullish take on MU stock. In the last three months, Micron has received no less than 16 buy ratings with just 3 hold ratings- giving it a ‘Strong Buy’ analyst consensus rating. These analysts have an average price target on the stock of $59, indicating huge upside potential of 40% from the current share price.