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Buy Micron Technology, Inc. (MU) Stock Because the Good Times Should Continue

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Micron Technology, Inc. (NASDAQ: MU ) stock has been the beneficiary of multiple tailwinds and almost zero headwinds over the past 20 months or so. Cloud data centers are growing at an unprecedented pace. Mobile workload demands continue to go up and up. The Internet of Things is giving birth to an entirely new growth area for performance, data collection and data storage. Virtual and augmented reality are reinvigorating growth in the video game world.

MU Stock: Buy Micron Technology, Inc. (MU) Stock Because the Good Times Should Continue

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Meanwhile, there really isn't much competition on the supply side of the memory chip market. As Barron's pointed out , there are really only three players on the DRAM side of things and five players on the flash side of things. Not many producers leads to tight supply. Tight supply with big demand leads to big gains in profitability.

That is why MU stock has rallied more than 115% since that start of 2016, versus just a 20% gain for the S&P 500 .

But MU stock has been stuck in neutral since June of this year. And the sideways stock has nothing to do with valuation. After all, MU stock is trading at just 5 times fiscal 2018 earnings estimates.

So what's going on?

Well, the market is worried that the good times won't last. The market thinks all those tailwinds can't last forever, and that a supply-side headwind is due sooner rather than later.

But those bearish arguments ignore the fact that demand is still ramping, and will continue to ramp into the foreseeable future.

Here's why.

Demand for Micron Chips Will Remain Robust

There is no arguing that the memory chip market is on fire right now.

The global mobile DRAM market had a big bounce back in the second quarter of 2017, according to DRAMeXchange . A memory components inventory build problem in the first quarter improved throughout the second quarter, leading to a near-15% sequential increase in revenue. Among top DRAM makers, Micron was singled out as one of the biggest growers in the quarter.

Moreover, this rebound in global mobile DRAM revenues is expected to continue. According to DRAMeXchange:

"Top three DRAM suppliers will see further increases in profits during third quarter as the recovery of the smartphone market leads to an uptick in contract prices."

Robust iPhone 8 demand should allow for this trend to continue in the fourth quarter as well, and furthermore sets up the whole market for continued gains in the first half of 2018.

The same dynamic is playing out in the NAND flash market. Global NAND flash revenue grew 8% sequentially in the second quarter. This growth is expected to continue, largely thanks to new smartphone launches. According to DRAMeXchange , "stock-up demand from smartphone clients will continue to put pressure on NAND Flash supply in the third quarter," and this under-supply situation will allow for robust revenue and profit growth from players like Micron.

All in all, demand is currently robust, and it's not going to slow anytime soon.

Because so much data is moving to the cloud, hyperscale data centers are still in their infancy relative to what they will be one day. Mobile is only picking up steam as e-commerce goes global. Just look at Alibaba Group Holding Ltd (NYSE: BABA ), where annual active consumers grew only 7% last quarter but mobile monthly active users grew 24%.

Meanwhile, connected home is booming. As more and more Millennials get their own homes, connected home demand will only increase. Artificial and virtual reality are just getting started, and the applications from those two technologies are robust.

Bottom Line on MU Stock

The only way MU stock falls big from here is if the current memory chip supply-demand dynamics change dramatically.

That means either demand has to come down in a big way, or supply has to go up in a big way.

But neither of those will happen. The demand outlook is exceptionally bullish because of secular growth in segments like cloud data centers, mobile commerce, virtual and augmented reality, and connected home. Meanwhile, even if supply does go up some, demand will remain so robust that small supply increases won't really affect the bigger picture.

So why sell MU stock here at 5 times next year's earnings?

Don't. Buy it and let the market move past these unnecessarily short-sighted concerns.

As of this writing, Luke Lango was long MU and BABA.

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The post Buy Micron Technology, Inc. (MU) Stock Because the Good Times Should Continue appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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