The recent selloff produced an interesting opportunity for chip-maker Micron Technology, Inc. (NASDAQ:MU). MU stock, which has essentially doubled over the past year thanks to a favorable supply/demand situation in its core memory market, dropped from the mid-$40’s to below $40 in a matter of days in early February.
The drop made no sense. Micron stock trades at just five-times forward earnings, so while valuation might be a concern for some hyper-growth tech stocks, that isn’t the case with MU stock. Moreover, there were no signs of deteriorating supply/demand dynamics in the memory market, so the fundamental growth narrative remained in-tact.
All in all, the drop below $40 was a great buying opportunity. Micron stock has steadily moved higher ever since then. It is now at $45 and change.
Is there more upside left? I think so. Here’s why.
Do You Hear The Music?
My motto with MU stock has been consistent for the past several months. So long as the music is still playing, MU is a name you want to own.
What exactly does this mean? In Micron’s core DRAM and NAND markets, everything is about supply and demand. Micron and competitors make a certain number of chips (supply) that go into a wide range products and locations, including smartphones, smartwatches, cloud data centers, and more (demand).
When supply outstrips demand, margins crumble and profits are meager. This is when there is no music. When demand outstrips supply, margins soar and profits are huge. This is when there is music.Right now, we are in an era where the music is playing loud and clear. Widespread digitization, from cloud data centers to autonomous driving to smart home tech, has created robust demand for DRAM and NAND components. But a limited number of competitors on the supplier front has kept supply constrained.
This has led to a surge in Micron profits and MU stock.
But Micron stock isn’t being awarded a massive valuation (only 5-times forward earnings) because investors are concerned that the music will stop playing at any second, and all those records profits will go away. That is a reasonable concern. In this market, supply can outstrip demand rather quickly.
All it takes is a slight demand slowdown, or a competitor ramping capacity.
But that just isn’t happening now. Nor will it happen in the foreseeable future. Even if capacity ramps, demand from various end markets (again, think cloud data centers, autonomous driving, and smart devices) remains robust enough to offset those supply increases.
That is why everyone even tangentially related to this market is reporting really good numbers.
Micron just gave a strong second quarter update in which they revised revenues up from $7 billion to $7.3 billion, and earnings up from $2.58 to $2.73. At the end of January, Advanced Micro Devices, Inc. (NASDAQ:AMD) reported a double beat quarter and gave a strong guide.
The quarter illustrated continued strong revenue growth and healthy margin expansion.
Also at the end of January, Samsung Electronics Co Ltd reported strong numbers in its Memory business, driven by a continued favorable dynamic of tight supply and strong demand. Samsung expects stable memory supply/demand over the next 12 months.
At the beginning of February, NVIDIA Corporation (NASDAQ:NVDA) also reported a double beat quarter and delivered a strong guide. It was yet another 30%-plus revenue growth quarter with huge margin expansion.
Bottom Line on MU Stock
Given commentary and numbers from critical players, it is clear to see that the favorable memory supply/demand dynamic which has propped up MU stock and profits over the past several quarters remains favorable today. Guides from these critical players imply that it will remain favorable into the foreseeable future.
That means the music is still playing. And will continue to play.
Consequently, Micron stock will stay on its upward trajectory.
As of this writing, Luke Lango was long MU and NVDA.
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