Micron Technology, Inc (NASDAQ:MU) stock is up by over 85% year-to-date. Is MU stock still a strong buy?
Shareholders of Boise, Idaho based Micron Technology, Inc (NASDAQ:MU) are having a merry time. And, not without reason. MU stock has notched up gains of over 85% year-to-date, crushing the Nasdaq Composite (INDEX:COMPX), up 22% in the same timeframe, by a huge margin. MU bears haven't been quiet either, with over $2 billion dollars-at-risk being held by MU shorts. The growing chatter of the bears has repeatedly pointed to the cyclical nature of the memory market as the big reason to sell Micron stock. However, as far as MU stock is concerned, we believe the cliche 'this time is different' will indeed hold true. To put it another way, the best days for Micron Technology, Inc stock, and its stockholders, are ahead of us. Yes, even after the massive 85% rally this year, MU stock is a good buy.
This Time Is Different For MU Stock
In the past, the impact of memory cycles has clearly been reflected in Micron stock fundamentals as well as the stock price. Just a glance at the Micron Net Income and stock price charts show us the ebbs and flows of the memory market.
The last downcycle in the memory market, according to Micron CFO Ernie Maddock, ran from the second half of 2015 to the first half of 2016, and as we can see Micron stock printed a bottom during that time. Wonder what happened to the Net Income? Micron's bottom line swung from a profit of nearly $3 billion in 2015 to a loss of $276 million in 2016. But, the company made a phenomenal comeback in 2017, which is clearly reflected in the Micron Net Income chart.
As Nomura analyst CW Chung had said at the beginning of the year, 2017 was set for an ultra-super cycle in the DRAM industry. With DRAM accounting for over two-thirds of Micron revenues, it is not surprising that Micron printed impressive numbers. And, does Micron expect to slow anytime soon? The latest quarter guidance offers some answers.
MU Stock Isn't Slowing Down Anytime Soon
If the management commentary on the recent earnings call is anything to go by, Micron Technology, Inc isn't slowing down anytime soon. The management has guided for a record quarter, both in terms of the top line as well as the bottom line. At its mid-point, the management guidance implies Q1 FY2018 EPS of $2.16 on revenue of $6.3 billion. With Micron's business looking set for a brighter time ahead, MU stock isn't slowing anytime soon.
The business strength in the various segment was also highlighted on the recent earnings call. Sanjay Mehrotra, CEO of Micron stated, "Moving on to the demand and supply fundamentals, we expect the industry to remain moderately undersupplied for the rest of 2017 for both DRAM and NAND." He went on to add, " We see DRAM industry supply bit growth of about 20 percent in calendar 2017, and expect it to grow at relatively similar levels in calendar 2018.......Our bit growth is supported by our 1X DRAM ramp, which represented mid-teens percent of our DRAM bit output in Q4, and will grow throughout the next several quarters to achieve bit output crossover as we exit calendar year 2018." Speaking of the NAND business, the CEO said "We expect industry NAND bit supply growth to finish calendar 2017 in the high 30 percent range" before adding that "As the industry continues to transition to 64-layer 3D NAND, we estimate industry bit supply growth in calendar 2018 will approach the 50 percent range, which should better satisfy the current unfulfilled demand."
In addition to the positive commentary from the Micron management, recent commentary from KeyBanc analyst Weston Twigg was also very encouraging. The analyst expects DRAM contract pricing to continue to rise throughout this year, which the analyst views as a strong positive for Micron stock, given the majority contribution of DRAM to Micron's top line.
In short, Micron is not only riding the ultra-supercycle in the memory market but is also set to see continued strength through calendar year 2018. In other words, Micron's business is set to deliver strong topline/earnings growth over the foreseeable quarters. With Micron's business looking set for a brighter time ahead, MU stock isn't slowing down anytime soon.
Micron Technology, Inc. Trades At Attractive Valuations
With Micron's business not at any risk of losing momentum anytime soon, let's now take a closer look at MU stock valuations. As we had discussed in our recent Micron coverage, the stock currently trades at extremely attractive valuations. MU stock currently quotes at 9.2X the trailing twelve month (TTM) earnings. And, that's after the stock has racked up gains of over 85% this year. On a forward basis, MU stock currently trades 5.4X the FY 2018 earnings estimate, which we view as extremely attractive. To put things in perspective, Micron stock has traded at an average earnings multiple of 17.3X over the last 5 years.
To sum up, a combination of encouraging business outlook, revenue/earnings growth visibility, expanding profit margins and extremely attractive valuations make Micron stock a screaming buy today, even after notching up impressive gains this year.
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