After Soaring Over The Last Year, Does Micron Have More Fuel Left In The Tank?

Semiconductor player Micron Technology (MU) closed out 2020 at $75.18, and since then, the stock price has climbed roughly 25%. So, should investors pause and wait for a retracement, or do shares still have more room to run?

Micron is a leading supplier of memory and storage chips used in a wide range of electronic devices. That said, the DRAM market is experiencing a severe shortage.      

Consequently, automotive manufacturers are closing plants due to semiconductor shortages, while projections for smartphones, gaming consoles and PC sales are robust. Micron projects a 20% increase in demand for DRAM, which combined with chip shortages, will likely drive prices higher. 

What’s more, Micron has a current trailing P/E ratio of 33.4 and a forward P/E ratio of 8.7, with the PEG of .43 indicating that the shares are undervalued. 

Recent Quarterly Results
Micron’s second quarter results beat on both the top and bottom lines, while management provided upbeat projections for the third quarter.  

Revenue increased 30% year-over-year to $6.236 billion, driven by a 44% increase in DRAM revenue and a 9% growth in NAND revenue. EPS of $0.98 beat estimates by three cents. Additionally, operating cash flow increased to $3.06 billion, rising from $1.97 billion in the prior quarter and $2 billion in the same period last year. 

Looking ahead, management guided for non-GAAP EPS of $1.55 to $1.69, reflecting a 96% yearly increase at the midpoint. What’s more, revenue forecasts of $6.9 to $7.3 billion would represent a gain of roughly 14% from the previous quarter.  

Demand And Revenue Drivers
Ample evidence of a DRAM demand/supply shortfall points to a probable price hike.   Automakers including General Motors (GM), Volkswagen (VWAGY), Ford (F), and Toyota (TM) have idled plants due to chip shortages. Meanwhile, Sony (SNEJF) claims that a lack of semiconductors led to a shortage of its PlayStation 5.

The pricing pressure can be seen with the recent price increase of 4Gb DDR4 SDRAM chips. Just two weeks ago, the DRAM spot price for that product was $2.68, up 250% from earlier this year.  

According to DRAMeXchange, DRAM prices are set to increase by 40% this year. That forecast goes along with a 13% to 18% quarterly increase for DRAM related to data centers, a similar increase for DRAM devoted to notebook manufacturers, and a 20% demand increase related to server shipments. 

Meanwhile, UBS forecasts a 5% quarterly increase in contract price of NAND memory in the second quarter of 2021, versus an initial estimate of a 7% decline. This is set to be followed by another 10% increase in the third quarter.

The Ace Up Micron’s Sleeve
With each generation of memory modules, semiconductor manufacturers strive to produce chips with increased performance and lower production costs. For years, Micron lagged the competition in terms of node transitions. 

However, in January, Micron unveiled a DRAM that provides a 40% improvement in memory density over its prior node. This came shortly after its introduction of a NAND that is 30% smaller but with significantly improved performance characteristics.     

Micron’s relationship with Apple (AAPL) sets a possible path forward for this evolution, as mobile accounted for nearly 30% of the company’s revenues last quarter.

Micron claims its new product provides “high-performance, high-density and low-power memory and storage in one compact package, equipping smartphones to handle data-intensive 5G workloads with dramatically increased speed and power efficiency."

The transition to 5G smartphones, which consume power at a 20% higher rate than 4G devices, results in an increase in battery size and a consequent need for smaller components for other functions. Micron’s chips can save 55% of printed circuit board space, while its new DRAM is 20% more power-efficient.  

Add in Gartner’s forecasts of an 11.4% increase in global sales of smartphones this year, combined with expected growth in data centers, personal computers and consoles, and it paints a compelling picture of a stock that still has room to run.

Wall Street’s Take
Turning to the analyst community, Micron has received 23 Buys and 4 Holds in the past three months. So, the consensus rating is a Strong Buy. At $119.42, the average analyst price target suggests 27% upside potential. (See Micron stock analysis on TipRanks)

Disclosure: On the date of publication, Chuck Walston did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

The post After Soaring Over The Last Year, Does Micron Have More Fuel Left In The Tank? appeared first on TipRanks Financial Blog.

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