Regardless of what Micron Technology, Inc. (NASDAQ:MU) reports in its fourth-quarter earnings announcement today, the memory supplier’s overall long-term prospects should continue to shine brightly. The semiconductor market is showing no signs of weakening demand for both high-speed storage and memory modules. The only question that investors with a long-term horizon should ask is what MU stock is worth over the next few years.
At a forward P/E multiple of just 5.4 times, Micron management could issue another upbeat outlook and the stock might still sell-off. This will only puzzle value investors, given the company has a bright growth outlook and few headwinds in the near-term.
Smartphone makers like Apple Inc. (NASDAQ:AAPL) and Samsung refreshed their devices. Chinese phone makers like Xiaomi and Huawei are also releasing incredibly powerful smartphones. All of these new product refreshes will drive the need for more memory and more storage per unit. That bodes well for MU stock: demand will drive supply higher, further lifting the company’s revenue growth for years to come.
Fair Value of MU Stock
Investors may use a five-year revenue exit model to estimate the fair value of Micron stock. Assume, for instance, that revenue will grow by at least 30% this year and at least 15% in each of the succeeding years. At a discount rate of between 12-13%, MU stock is worth at least around $45 a share. (This model uses those growth assumptions.)
Forecasting such lofty revenue growth for Micron is hardly exuberant. There are only three or four main players in the DRAM memory market. The perfect storm of new smartphone releases this quarter and new PC chips from Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD) is only driving memory prices higher.
Solid state drives, which use NAND chips, are becoming mainstream because they boost computer input/output (I/O) speeds by several multiples, improving the computing experience. Micron’s foray into the new 3D Xpoint non-volatile memory, in partnership with Intel, will give it a technological lead over competitors and also lift profit margins.
The server market is yet another positive driver for NAND and DRAM demand. Supercomputers require massive amounts of memory and high-speed I/O modules to run. As AI solutions proliferate, demand for supercomputers will add to the ever-growing demand for memory and storage. This is on top of the growth for cloud computing.The Internet of Things (IoT) is another segment that requires NAND, so that will also drive demand for Micron’s products.
The IoT phenomenon is very real, too. Advanced driver-assistance systems (ADAS) involves some form of IoT. Investors may not know how big IoT will become but chances are very high that it will be a massive opportunity for Micron growing NAND demand. Nearly every car maker has ADAS in its business plan. IoT’s growth will only lengthen the super-cycle currently underway in the memory chip market.
The Risk In Micron Stock
Back when MU stock traded in the low teens, markets fretted over Samsung’s capabilities to hurt the memory market. The Korean conglomerate could build a plant and flood the market with excess supply. It could cut prices to take market share, too. Yet Samsung is better off letting the market dictate prices and supply. It enjoys the high-profit margins of its competitors, so long as it does not disrupt the equilibrium.
Micron continues to attract investor attention. Even at new yearly highs, the stock trades at below-average forward multiples. With demand nearly assured for memory and storage for at least the next few quarters, MU stock will capture the interest of value investors and tech investors looking for a conservative stock buying idea.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
