Could Micron Technology, Inc. Almost Double to $100?

Bret Kenwell

Updated Thu, May 17, 2018, 11:22 PM

Looking for high growth and a dirt-cheap valuation? Plenty of companies fit the former or the latter, many don’t fit either and a rare few can claim both descriptions. Micron Technology, Inc. (NASDAQ:MU) is one of the latter. Despite this, however, MU stock hasn’t been as much of a no-brainer trade as some investors may think.

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Put simply, Micron operates in a boom-bust industry selling DRAM and NAND memory. Meaning that when times are good and the supply/demand situation is in Micron’s favor, business is booming. When the industry becomes saturated in supply, though, companies like Micron suffer. So do those who produce equipment for companies like Micron, such as Applied Materials, Inc. (NASDAQ:AMAT) and Lam Research Corporation (NASDAQ:LRCX).

In this particular case, industry insiders and DRAM/NAND buyers expected pricing to fall in the second half of 2017. Here we are entering the second half of 2018 and pricing for DRAM is still holding up.

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Admittedly, NAND has seen some pressure, but because demand for memory continues to climb, companies aren’t taking their foot off the gas — they keep buying NAND and DRAM left and right to keep up with enterprise and consumer demand. Likewise, Micron, Samsung Electronics Co (OTCMKTS:SSNLF) and other producers are staying disciplined and not allowing a glut of supply to form.

So Why Don’t People Like MU Stock?

Trading at a paltry 4.9 times this year’s earnings, it’s clear investors are still skeptical. They still think the “bust” part of the cycle is coming. Eventually, they’ll be right and MU stock will suffer. But it’s not happening right now and it will depend on how well Micron can handle 2019.

For this year, analysts expect revenue to grow 44% to $29.3 billion. On the earnings front, they are looking for growth of 121%.

In February, expectations “only” called for 40% sales growth and 102% earnings growth. A month before that, analysts were looking for 36% sales growth and sub-100% earnings growth. Finally, in December, analysts were only expect earnings growth of 60%. See how much they keep doubting Micron?

And remember, we’re talking about a stock trading at sub-5 times earnings.

Estimates for 2019 are on the rise as well. Sales growth is now expected to be positive, rather than negative, albeit with just 3.7% growth from 2018. On the earnings front, analysts still expect profit to fall about 10% next year, but keep in mind estimates for 2019 have gone from $8.51 per share 90 days ago to $9.85 per share at present. Who’s to say those aren’t too low as well?

MU can be volatile, but the point is all the same. Until there’s a breakdown in NAND and DRAM prices, we shouldn’t bet against MU stock at this valuation. The analysts are falling in line, too. The other day, Stifel Nicolaus analysts hit MU with a $101 price target, implying more than 80% upside. The average target sits all the way up at $74, implying more than 32% upside. In all, there are four targets of $100 or more.

So a run to triple digits isn’t as crazy as it seems.

Trading Micron Stock

Not long ago, we took a look around the market to see what executives were saying about pricing. Here’s just two excerpts that we found:

“We continue to see some nominal increases in DRAM…So we factor in our plans the elevated DRAM for the remainder of the year.” — Antonio Neri CEO at Hewlett Packard Enterprise Co (NYSE:HPE).

“We saw industry-wide increases in component costs again in Q1, driven primarily by DRAM, which continued to put pressure on margins. We now expect to see increased component costs throughout FY 2018.” — Catherine A. Lesjak, CFO at HP Inc (NYSE:HPQ).

That bodes quite well for MU stock and it’s one reason that I’ve stayed bullish on it all through 2017 and so far into 2018. In March, things were looking up, as Micron stock exploded through the $50 mark and quickly ran over $60 per share.

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This proved to be too far too fast, though, and shares promptly pulled back to $46 earlier this month. If MU stock can stay above $55, it can set up shares to retest the highs. It helps that momentum via the MACD favors the bulls and that the stock isn’t overbought via the RSI (both shown on the chart with orange circles).

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Short-term bulls may want to use the 50-day moving average or even $55 as their stop-loss. Long-term bulls should consider buying Micron stock on pullbacks to the 150-day moving average. I seldom use this average, but it seems to work for MU.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.