Last month I said investors should ride Micron Technology (MU) higher. With the stock up 18% since then, is it time to forget about this memory maker?
Back on Feb. 8, I thought investors should continue to ride the momentum in Micron Technologies. After the company's winter analyst meeting, it became clear Micron was moving away from being a supplier of commodity memory -- and the demand for more-complex types of memory was taking off.
I think the stock can go higher because of tight DRAM supplies and higher average selling prices (ASP). It doesn't seem competitors like Samsung are itching for a fight either. Samsung dumped a ton of chips on the market at the end of 2015 and wrecked pricing for everyone. DRAM prices fell from $2.50 to as low as $1.90 back then.
Last Friday, Micron reported second-quarter fiscal 2017 earnings of $0.90 a share, $0.04 better than expected. Revenue rose 58.4% to $4.65 billion. Revenue rose a staggering 17% sequentially -- due to a 21% increase in average selling prices and an 18% increase in trade NAND sales volumes.
GAAP gross margin jumped 11.2% to 36.7% due to average selling prices and manufacturing cost reductions.
The company increased third-quarter guidance. Management now sees earnings of $1.43 to $1.57 a share vs. the $0.93 estimate. Revenue is expected to range between $5.2 to $5.6 billion vs. the previous $4.52 billion estimate.
Cloud computing is eating up memory. The cloud is estimated to be a $5.2 billion opportunity. And bits are growing 60%. According to research firm IDC, total cloud IT infrastructure spending is up 18% in 2017, reaching $44.2 billion. Micron's 3D NAND chips offer 50% higher capacity than competitors and enable customers to store 8 TB in just 2.5 inches of space.
From fiscal year 2015 to 2017 (ending August), bit shipments are estimated to grow 20% to 30% for DRAM and 30% to 40% for NAND memory. The 2016-2018 forecast is for bit growth for DRAM to jump 30% to 40% and 45% to 55% for NAND.
I think consensus Street estimates are too low for Micron. Average selling prices bottomed out in the fourth quarter of fiscal 2016 at $1.94, but are expected to jump to around $2.60 to $2.65, as tight supply and high demand drive prices up. I think prices could go much higher. Recall, Micron was able to achieve ASPs in the $3.50 to $3.75 range in 2014, so it's not out of the question for ASPs to keep increasing.
In 2016, Micron had EBITDA of just $1.9 billion. If ASPs can get over the $3.25 level, EBITDA could be near $4 billion. Higher selling prices combined with lower manufacturing costs could drive gross margins from the high 30s to mid 40, which means Micron has the possibility of raising guidance almost every quarter for the next few quarters. If I'm right, the fiscal 2018 estimate of $3.49 will move over $4 per share by the summer, which would drive the stock from its current perch of $28 to $40 a share.
Yes, the stock is up some 180%, but that doesn't mean it can't go higher. Don't forget about Micron.