Micron Technology Inc. stock is up by over 45% in the year-to-date. But, now is not the time to sell your shares.
Micron Technology, Inc. (NASDAQ:MU) shares have had a rather quiet month. Micron stock was up by 46% as on July 21, before fears of oversupply and competition from Chinese semicon competitors started to drag the stock. As these concerns surfaced, Micron stock fell below crucial support levels, all the way down to $27.5, before starting a steady climb back. The stock closed the last trading session at a price of $31.97 a piece, 4 cents lower than the July 21 close. Micron stock price is finally back to its pre-dip levels, which raises the question; Should you book profits in Micron stock, or is the Sanjay Mehrotra led Micron still a good buy now?
Will Chinese Supply Flood The Market?
As mentioned earlier in our post, fears that China will flood the memory market with domestic products have played a large part in dragging Micron stock lower. But, how much of a truth lies in there? Well, while Chinese firms have definitely been unveiling ambitious plans, do they have the skills to put pressure on the current giants of the memory market? Unlikely.
According to semienginering.com, Chinese firms have been pumping in billions of dollars into 3D NAND and DRAM fab projects. However, it will be a while before these fabs can really compete globally. Why? Put simply, China is starting from scratch, as far as semiconductor production goes, and is playing catch-up to the current global leaders. Referring to the rise of the Chinese Memory industry, Risto Puhakka, president of VLSI Research, a leading chip research firm stated, "It won’t happen in the short term. China has the capital, but they lack the skill level and IP." Now that the China risk is addressed, will oversupply really hurt Micron stock?
No 'Memory Glut' Scare For Micron Stock
Some recent rumors would have you believe that oversupply in the near future is another key risk for Micron stock. Yes, a large part of the strong results over the last few quarters are attributable to strong growth in ASPs (Average selling prices). Hence, a memory glut could hurt Micron. However, evidence suggests otherwise.
A recent report from research firm Gartner projects worldwide semiconductor revenue to top $400 billion in 2017 for the first time. According to the estimates, the semiconductor market is poised for 16.8% year-over-year growth, which doesn't really reflect a 'glut' or conditions of 'oversupply.' Zeroing in on the memory market, Andrew Norwood, research vice president at Gartner said, "A shortage of memory is creating a boom in the overall semiconductor market. Memory vendors have been able to increase their price for DRAM and NAND, driving revenue and margins higher." Gartner expects the memory market to grow 52% in 2017, which reinforces the belief that business environment for Micron will continue to remain favorable.
Longer Term Tailwinds For Micron Stock
The memory market has historically been a cyclical market, a fact that Micron stock investors will be surely familiar with. However, fundamental changes in how we use/consume data and the rise of AI are long term tailwinds which will aid Micron. According to a recent address titled 'Computing of the future' delivered by Jeffrey Welser, Director of Research at IBM Research Almaden, our data needs will rise exponentially as we collect, store and analyze more and more data, at a faster rate than ever before. In short, storage needs will continue to rise long term which will benefit memory players like Micron.
Memory players also stand to benefit from the rise of AI and machine learning in cloud computing. As per recent commentary from Credit Suisse analyst John Pitzer, this trend has made memory extremely important to power consumption and performance, which are key costs for data center operators. As reported by Barron's, Pitzer goes so far as to say that "we came away most positive on MU as HBM is 'de-commoditizing’ memory,” referring to so-called high-bandwidth memory, a new technology standard for server computing. The analyst cited the higher ASPs of HBM parts and the increasing use of these parts in each processor for Machine learning. The rise of AI is no secret. Hence, Pitzer's comments suggest continued revenue/earnings growth for Micron over the longer term.
Micron Stock is trading at extremely attractive valuations
Micron's growth story is in no real danger of coming to a grinding halt. In fact, if the recent commentary/news is something go by, Micron is poised for brighter days ahead. With this in the background, let's now take a look at the valuations. Micron stock currently at 14.7x its trailing twelve months earnings. These valuations appear extremely attractive, compared to the broader markets as well as the historic valuations of MU stock.
Wall Street currently expects Micron to report FY 2018 EPS of $6.08 a share, which is up by 6 cents from the time of our previous Micron stock valuation nearly a month ago. To put it another way, Micron stock trades at 5.25x the FY2018 estimate, which is extremely attractive. As noted in our earlier valuation, we value Micron stock at 10x the FY 2018 estimate, for a $61 price target, which implies a 90% upside from the last close. We also believe that this is a conservative estimate given the strong tailwinds Micron is currently riding.
Bullish Sentiment For Micron Stock
Micron is a strong buy. This is a fact reflected by the current sentiment among Wall Street analysts. Out of 30 analysts tracking Micron stock, 27 analysts rate the stock either at 'buy' or a 'strong buy' while the rest have issued the stock with a sell rating. Wall Street analysts currently have a consensus price target of $43.4 on Micron stock, which represents a nearly 36% upside from the last closing price.
To sum up, investors who rode the recent dip in Micron stock should continue to stay invested in Micron stock. We believe that the dip was a news-driven sell-off, and, in the longer term, will prove to be only a minor blip on the Micron stock chart. Given the recent rise above key resistance from the 20-day, 50-day and 100-day simple moving averages (SMAs), long term investors should continue to accumulate more Micron shares at these extremely attractive forward valuations.
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