Strike While Micron Technology, Inc. (MU) Stock Is Hot!

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If you bought Micron Technology, Inc. (NASDAQ: MU ) at the beginning of 2017, you're sitting on a 44.8% return through June 23. That means MU stock has appreciated more than five times than the S&P 500 .

Micron Technology, Inc. (MU) Stock Is on Track for Decade-Long Highs

Source: Mike Deal via Flickr

MU stock is on a big run as a result of stronger business and industry fundamentals - the same ones driving names like Advanced Micro Devices, Inc. (NASDAQ: AMD ) and Nvidia Corporation (NASDAQ: NVDA ). As InvestorPlace's Tom Taulli wrote recently :

"DRAM prices have certainly been going in the right direction for MU stock … This has resulted in a nice increase in gross margins, which have gone from 18% in Q4 to 38.5% in Q2 … The outlook for gross margins for Q3 is 44%-48%."

As Taulli points out, investors are more than willing to pay up for Micron stock given its rapid profitability improvement in recent quarters. The big question for investors is whether this will continue.

What Does History Tell Us?

In the past decade, Micron's best year regarding gross margins and overall revenue was fiscal 2014 when it generated $5.4 billion in gross profits from $16.4 billion in revenue for a 33.2% gross margin.

In Q2 2014, it had a gross margin of 34.2%, 430 basis points less than in Q2 2017. In Q4 2014, it had a gross margin of 32.8%, more than 10 percentage points less than what Micron expects in this year's third quarter.

If Micron's able to meet its outlook for Q3 2017 and then deliver a 40% gross margin in the final quarter, here's what its year will look like from a revenue and gross margin perspective.

Micron's Fiscal 2017

Revenue Gross Profit Gross Margin Q1 2017 (actual) $3.97B $1.0B 25.5% Q2 2017 (actual) $4.65B $1.7B 36.6% Q3 2017 (estimate) $5.41B $2.5B 46.2%* Q4 2017 (estimate) $5.60B $2.2B 40.0%** Total$19.6B$7.4B37.8%

Source: Yahoo Finance, Micron quarterly reports

* Micron outlook for Q3 2017

** My conservative estimate

Record Results

If Micron delivers on its outlook for gross margins and meets or exceeds analyst estimates for revenue, its totals for fiscal 2017 will smash through any numbers it's done in the past, setting record revenues, gross margins, and of course, gross profits.

It still has some work to do if it wants to get there.

Through the first six months of fiscal 2017, Micron's delivered a gross margin of 31.3%, 160 basis points less than through the first six months of fiscal 2014. However, due to the $470 million in additional revenue in 2017, it's managed to equal its 2014 gross profits through the first two quarters of the year.

Essentially, it's a horse race.

However, given that demand for DRAM and NAND chips remains high and supply shortages continue, I'd say the likelihood of hitting $19.6 billion in revenue and $7.4 billion in gross profits in 2017 is much better than 50/50.

What Does This Mean for Valuation?

Micron's on pace for its most profitable year in its history. If investors play along, its valuation should also be the highest ever.

At the end of 2014, Micron had a market cap of $37.6 billion. Its current market cap is $34.9 billion. Assuming Micron hits its revenue and gross profit numbers, Micron's got at least 15% upside from here, probably a whole lot more given the S&P 500 is trading at 21.2 times earnings, a multiple 14.0% higher than in 2014.

Also, we're talking about potential records for both revenue and gross profits, which should get investors to open their pocketbooks a little wider than normal.

Bottom Line for MU Stock

I'm not usually a momentum investor, but Micron's business seems to be strengthening. Given the industry's tendency to be very cyclical in nature, I think tech investors ought to strike while the iron's hot.

In 12-18 months, the situation might not be nearly as bright.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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The post Strike While Micron Technology, Inc. (MU) Stock Is Hot! 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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