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Shubham Jaipuria
Shubham Jaipuria
Articles (45) 

Why Micron Still Has Room to Run

Micron seems to be well positioned to tackle changing industry dynamics

November 06, 2018 | About:

It has been a volatile year for Micron Technologies (NASDAQ:MU). After reporting strong revenue, the stock crossed the $60 mark, but it has since crashed to near $40 levels. The stock is considered a proxy for memory prices, and the forecasted fall in the overall memory chip market has led to the steep drop in Micron’s share price.

While the industry is pricing in lower earnings per share and revenues owing to oversupply and lower price concerns, the overall negative impact is not expected to be long lasting and damaging to the stock. Although pricing fluctuations will always trouble the industry, the increasing prevalence of data centers and PCs is expected to continue to drive up memory unit sales and thus reduce the impact of falling prices.

“Looking ahead to calendar 2019, we plan to grow DRAM bits in line with estimated industry growth of approximately 20% and plan to grow NAND bits somewhat above our expectation of industry growth of 35% to 40%,” CEO Sanjay Mehrotra said in the fourth-quarter earnings call.

Moreover, pessimists fear Micron is faced with the threat of falling NAND prices and demand. What is exciting for the company is the recent deal in which it has agreed to buy out Intel’s (NASDAQ:INTC) stake in the IM Flash Joint Venture, which was established in 2006 to manufacture NAND memory. Micron will get the Utah facility to manufacture 3D XPoint and will allow the firm to run its own line of products.

The U.S. Department of Justice recently stood up against Taiwan-based United Microelectronics (NYSE:UMC) and Chinese State-owned Fujian Jinhua Integrated Circuit on charges that they tried to steal Micron’s trade secrets. Although it might be a shot in the dark for this long-running case in which Micron’s secrets potentially were leaked, it is a massive development in the U.S.-China trade face-off, and it will interesting to see how things pan out.

Also, as data centers and graphics pick up thanks to the increasing demand for AI and big data analytics, Micron is expected to continue to outperform. “More than one-third of our total revenues in fiscal 2018 were from data center and graphics,” Mehrotra said in the fourth-quarter earnings call. “Our annual revenues in these markets have more than doubled year-over-year.”

Coming to the real debate concerning investors eyeing Micron stock, the price-earnings ratio seems massively undervalued. It floats a price-earnings ratio of 3.47 compared with the industry median of 19.55 and a forward price-earnings ratio of 3.72 compared with the industry median of 18.55. Considering current industry dynamics, a massive decline in revenue or earnings per share is not that likely, thereby indicating that investor concerns are blown out of proportion.

As a result, Micron still seems to be a long-term value play. While the tech industry is not new to companies piling up inventories when prices are sky high and then facing oversupply concerns, these negative factors are not expected to overshadow the strength of the overall memory industry. Even if demand or prices fall in the near term, memory will still be used in all products we use in our day-to-day lives, and Micron being a leader in the segment will definitely come out in the green.

Disclosure: I do not own any of the stocks mentioned.

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