- Analysts are growing bullish on Micron and expecting a 62% operating income growth over the next year.
- The company also saw a sharp 8.7% decline in short interest over the past cycle.
- The market appears to be growing bullish about Micron.
Shareholders of Micron Technology (NASDAQ:MU) have had an enjoyable run over the past few months; with the MU stock price rising by almost 80% since the lows it created back in May. The chipmaker, which was once termed as distressed by the analyst community just 6 months ago, has turned out to be one of the best performers across the major stock indices of the U.S in terms of stock gains.
With such a blockbuster rally behind it, you’d normally expect the scrip to cool-down, consolidate or correct going forward. But that’s not necessarily the case with the Micron stock. In fact, there are reasons to believe that the rally could continue further, as market participants appear to be getting even more bullish about the company’s prospects. Let’s take a closer look.
I’d like to start by saying that Micron has been a subject of several negative reports in recent months. Weak DRAM pricing environment, slowing down PC sales and an oversupply of DRAM modules in the market weren’t exactly helpful for the chipmaker. Since the firm generates about 60% of its revenue from the sale of DRAM-based products, the aforementioned negative triggers weighed down heavily on the chipmaker’s financials. But what’s interesting is that the bearishness surrounding Micron appears to be fading away.
There are reportedly 27 analysts with in-depth ongoing coverage on Micron stock currently. Interestingly, none of them have a sell rating on the company. In fact, only 4 of them think that the chipmaker would underperform the benchmark indices while the remaining 23 have rated the company as either a “hold”, “buy” or “outperform.”
So basically, 86% of the analysts say that Micron’s financial position would improve from hereon. This may not mean much in isolation but we have to consider the fact that if so many analysts are flocking to rate Micron as a “Buy”, then the company might actually be doing things right. Also, there is not even a single analyst rating the company as a “sell” so that goes to show that the analyst community isn’t projecting any foreseeable downside to the chipmaker’s financials or its stock price.
I’ve already discussed in my previous article about how (and why) Micron’s DRAM division could power its overall performance going forward, so I won’t be going over the same points again. But what I didn’t brush up on, back then, was, how much growth are we actually looking at? 10% top line growth? 15% top line growth? Well, the analyst consensus projects that Micron’s revenue and operating income would grow at a blistering 22% and 62% next year alone, respectively. For a firm that was considered incapable of even covering its interest payments merely 6 months ago, this is a spectacular turnaround, even if it is just on paper right now.
There are two things to note here:
- The analyst community has grown to be very bullish on Micron;
- Micron’s price-to-sales ratio of just 1.4x is quite low for a company that’s projected to post a 22% revenue growth in the subsequent fiscal year, leaving ample room for stock appreciation.
Declining Short Interest
Next, I’d like to bring the readers’ attention to Micron’s short interest scenario. The metric is basically the aggregate number of short positions that are open and yet to be covered. So, a drastic swing in a company’s short interest numbers helps us in gauging the market sentiment towards the concerned publicly traded firm.
In this case, Micron's short interest plunged by about 8.7% during FINRA's last reporting cycle. To be specific, about 70.45 million shares of Micron were short at the end of September, down from about 77.1 million shares in mid-September. This essentially means that market participants aggressively closed down their short positions over the mentioned period as, perhaps, they no longer foresee a justifiable drop in Micron’s stock price in the short-term time frame.
But more importantly, it highlights the fact that there is a reduced selling pressure on Micron stock. The trading volume increased over the mentioned period so it’s also possible that market participants are growing bullish on the stock. If the trend is similar in the next reporting cycle as well, the sustained short covering might further boost Micron’s stock price by a few percentage points.
But overall, I see this drop in short interest as a positive trigger for the company and its stock price. It could very well reinvigorate long-side investor participation over the coming weeks.
Putting it all together
If you haven’t already read my last article on Micron’s improving business prospects, please do read it here. But coming back to this post, the improving short interest scenario, bold analyst projections and a low sales-to-price ratio are particularly encouraging for long-side investors. Market sentiment for Micron stock appears to be changing for good, and it might as well entail a sustained upside in the chipmaker’s stock price going forward. Hence, I believe that it’s a good time to be bullish on Micron stock!
Also see: Amigobulls latest top technology stock picks.