A global leader in DRAM and NAND chips, Micron Technology Inc. (MU, Financial) came under heavy selling pressure this year as concerns regarding the trade war between Washington D.C. and Beijing took a toll on investor confidence. Changing industry dynamics and the shift toward cloud computing, however, has pushed the company onto the radar once again, with analysts debating its long-term potential.
Booming memory prices over the past year coupled with exceptional demand for data storage has driven confidence in Micron as the global economy becomes more data-centric. With artificial intelligence, machine learning and cloud computing taking over our lives, the company's services fill a gap in the space by creating more value through its data storage solutions. Moreover, autonomous driving and industrial automation are expected to drive demand for Micron’s products higher.
While it isn't surprising the entire semiconductor industry was beaten down as a result of the trade war, given its high dependence on China, the pessimism seems to have been blown out of proportion. Micron is not just a market leader in the DRAM and NAND product segments, but it is also expected to generate massive revenues from the upcoming artificial intelligence and machine learning developments.
While the company is generating over 70% of its revenues from the dynamic random access memory offering, it is not completely ignoring NAND chips, owing to their pricing and efficiency. Having said that, DRAM is expected to be the major revenue contributor and might just completely edge out NAND.
Among the latest developments is Micron’s joint partnership with Intel Corp. (INTC, Financial) for the second generation of 3D XPoint technology, which is expected to launch in 2019. While future developments using this technology will be pursued independently, the partnership cheered investors, sending shares higher.
"We remain focused on our 3D XPoint product development and are on track to introduce our first products in late calendar 2019, with meaningful revenue in 2020,” President and CEO Sanjay Mehrotra said during the earnings call.
This, in turn, is expected to weigh on NAND sales as the 3D XPoint product is projected to perform more efficiently. Moreover, a slight demand-supply mismatch is expected to play in Micron’s favor as the chipmaker won’t be forced to cut its margins by slashing prices for its products.
Moreover, Micron reported impressive numbers in the most recent quarter, with revenues up 40% year over year and free cash flow per share reaching an all-time high of $6.18. Adding to the joy, the company's revenue guidance was increased to a range of $8 billion to $8.4 billion, compared with $6.14 billion a year ago, while the earnings per share guidance was increased to a range of $3.23 to $3.37. It was $2.02 per share in the prior-year quarter.
Micron also announced a $10 billion share buyback in May, acknowledging the stock is undervalued currently. Trading at a forward price-earnings ratio of 4.36 as compared to the industry median of 18.55, the stock does have tremendous upside potential.
“We are on the strongest financial footing in company's 40-year history, allowing us to make investments that will capitalize on the secular growth trends driven by the data economy,” Chief Financial Officer Dave Zinsner said during the earnings call.Â
Overall, the semiconductor industry is going through a great phase. With the global chip market expected to reach nearly $250 billion in the next five years, industry giants like Micron are expected to be great value plays. While geopolitical concerns have weighed on the stock recently, the long-term outlook remains tremendously optimistic.
Disclosure: I do not own any of the stocks mentioned.
