Shares of Micron Technology Inc. are up by over a whopping 142% over the last 52 weeks. Can MU stock continue this rally?
Boise, Idaho based Micron (NASDAQ:MU) has been one of the hottest tech plays of 2017. Shares of the Sanjay Mehrotra led semiconductor company are up by 45% year-to-date, crushing the 17.3% returns by the Nasdaq Composite (INDEX:COMPX). The performance over the last one year is even more impressive. MU stock price is up by 142% in the last one year, a time period which has seen the NASDAQ composite rise 25.5%. Given the impressive returns MU investors have enjoyed, is it time to book profits and sell Micron stock? Or, Is Micron stock still an attractive buy?
The Rally In MU Stock
As we have written above, Micron stock has had an impressive run over the last year, rising from $13 price levels to the current $30+ price levels. As investors, it's easy to get caught up in the constant chatter around a stock's returns. In the process, investors often forget that the stock represents a stake in an underlying business, the performance of which is essentially what drives the stock price over a longer period of time. While the rally in MU stock has been impressive by any yardstick, MU stock investors should look at the fundamentals underlying Micron stock before deciding to sell Micron stock.
The Supportive Business Environment
As most Micron Technology investors would know, Micron stock is a play on the memory market. The company manufactures memory products based on the DRAM, NAND, NOR Flash, 3D X Point technologies. The company has been a beneficiary of increasing DRAM and NAND demand as well as improving pricing environment in the DRAM market. Quoting from the Micron Q3 2017 10-Q filing, "Total net sales for the third quarter of 2017 increased 92% as compared to the third quarter of 2016 primarily due to increases in DRAM and Trade NAND gigabits sold and increases in average selling prices for DRAM products."
The pricing environment in the DRAM market is expected to continue to improve, which was also pointed out by a fellow Amigobulls author in a recent post. According to DRAMexchange, the global leader in DRAM/NAND research, the DRAM prices will see a sequential improvement of 3%-8% in Q3 2017 (June-September 2017), which should help Micron close out FY 2017 (August ending) on a strong note.
A Huge Improvement In Fundamentals
The supportive business environment has had a clear positive impact on Micron's fundamentals. Micron announced its Q3 2017 (May 2017 ending) earnings report last month. The company saw its top line grow to $5.57 billion in Q3 2017, a 92% year-over-year improvement. The Net Income for the quarter came in at $1.65 billion, a huge improvement from the $215 million loss the company had posted in the year-ago quarter.
For the first 9 months of the fiscal, Micron reported a bottom line of $2.72 billion, up from a loss of $106 million in the year ago comparable period. On the revenue front, the company saw revenues expand by 54% through the first 9 months of its Fiscal 2017. The solid growth in top line and the expansion in profit margins has seen the company's fundamentals outgrow the rally in MU stock. Looking at it another way, Micron stock is trading at attractive valuations, even after the 100%+ returns over the last one year.
Attractive Valuations Make Micron Stock A Strong Buy
Micron stock today trades at a trailing twelve month (TTM) price-to-earnings (PE ratio) multiple of 14.65x, which is a steep discount to the 26.01x multiple of the S&P 500 (INDEX:SPAL). The stock is also trading at a discount to its historic valuations, with the average 5-year PE ratio at 17.46x. In other words, Micron stock today trades at a discount to the broader market as well as its own historic valuations.
The story gets even more interesting once you consider the earnings estimates. Micron reported EPS of 6 cents in FY 2016. According to the current estimates, Micron Technology is expected to report EPS of $4.71 in FY 2017 and $6.02 in FY 2018. At the last closing price of $31.79 a share, Micron stock currently trades at a 15-month forward multiple of 5.02x, which is extremely attractive given the current S&P 500 valuations as well as the historic valuations of MU stock. At 10x the FY 2018 estimates, a $60 price target for Micron stock is a very realistic estimate. The $60 price target represents a nearly 100% return over the next 15 months, which is not something investors would want to let slip through.
Shares of Micron have rallied strongly over the last one year. However, Micron stock is still a strong buy, given the attractive valuations, re-rating potential and the earnings growth. Hence, long term investors should continue to buy/accumulate Micron stock. The Micron rally looks set to continue.
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