One of the top-performing stocks on the S&P 500 in the past decade has been semiconductor giant $MU- Micron Technology. While the S&P 500 is up 367% since August 2011, MU stock has returned 1,115% in the last 10 years. Despite its astonishing gains, Micron continues to trade at an attractive multiple making it a top bet for both growth and value investors.
Further, Micron stock is also down 26% from its record highs, allowing investors to buy the dip. Let’s see why I am bullish on this company right now.
Micron designs, manufactures and sells memory and storage products all around the world. It has multiple business segments that include Compute & Networking, Mobile, Storage, and Embedded.
In the company’s fiscal third quarter of 2021 ended in May, Micron saw a 36% year-over-year increase in sales which stood at $7.42 billion. The top-line also grew by 19% on a sequential basis while net income more than doubled to $1.7 billion or $1.88 per share compared to the year-ago period. Comparatively, analysts forecast the company to post sales of $7.23 billion and earnings of $1.71 per share in fiscal Q3.
Micron’s operating cash flow rose to $3.54 billion, up from $2.02 billion in Q3 of fiscal 2020. Its management attributed the stellar growth to multiple market and product revenue records that enabled Micron to achieve the largest sequential earnings improvement in its history.
In fiscal Q4 of fiscal 2021, it forecast sales between $8 billion and $8.4 billion while earnings are forecast between $2.20 and $2.40 per share. Analysts expect sales to touch $7.86 billion and earnings of $2.18 in Q4.
Micron has managed to beat consensus estimates in Q3 and has provided better than expected guidance for Q4 as well.
The profits for semiconductor chip manufacturers depend on the demand and supply of these chips. So, if there is an oversupply of chips, prices will fall and impact profits negatively. Alternatively, if supply is constrained, chip prices will increase boosting the bottom line.
In short, semiconductor is a highly cyclical industry but Micron has experienced a massive uptick in profitability in recent quarters due to the ongoing shortages in chips.
Micron is one of the largest DRAM manufacturers in the world and is part of a group where just six companies develop NAND flash. The prices of NAND and DRAM have both increased in the first six months of 2021.
For instance, DRAM prices were up over 12% in the first two quarters of 2021, and its expected to rise by mid-single digits in Q3 as well. NAND Flash prices were impacted by oversupply in Q1 and fell 5% but are forecast to gain momentum in the subsequent quarters.
However, a report from The Fly states that Summit Insights Group expects the semiconductor shortage to end by Q4 of 2021 which might lead to lower profits for Micron and its peers.
Even if the downcycle occurs, it will remain a short-term tailwind for Micron. The company is part of multiple markets including data centers, mobile, and personal computers all of which are growing at a stellar pace. Further, Micron has been successful in driving tech transitions over the years and has showcased its resilient business model in the past too.
Micron stock is valued at a market cap of $79 billion which means it's trading at a forward price to fiscal 2022 sales multiple of 2.14x. Its forward price to earnings multiple is also low at 6.2x especially given that analysts expect earnings to rise at an annual rate of 64% in the next five years.
Micron also has a cash-rich balance sheet and has committed to deploy at least 50% of free cash flow on share buyback programs which will continue to improve investor value.