Semiconductor cycle is turning to Micron’s advantage
This complex memory microchip manufacturer is a good illustration that not all quality technology businesses trade on sky-high valuations. NASDAQ-listed Micron Technology is one of the world’s top producers of DRAM (dynamic random access memory) and NAND flash memory chips.
DRAM is used in PCs, laptops, smartphones and servers to perform their various functions. NAND flash is what allows a memory stick to work, or you to store music on your phone.
A year ago, Micron was struggling, pushing against supply gluts and declining prices, as happens from time to time in this notoriously cyclical semiconductor industry. Then Covid came. But as with many tech stocks, what started as a headwind ended up creating an ideal environment in which the company could thrive.
Supply chains were disrupted by the pandemic, and the demand for memory chips in data centres and computers increased at the same time. This saw Micron’s share price double since August, but we anticipate the rally will continue through 2021 as chip supply and pricing dynamics continue to improve.
Many analysts agree. ‘Our industry checks indicate lean DRAM channel inventory, and we expect contract prices to improve sequentially into the February and May quarters,’ said Summit Insights earlier this month.
Summit analysts also believe that NAND prices have now hit rock-bottom with recovery drivers coming from innovations in augmented and virtual reality, bendable smartphones and 5G adoption. 5G goes beyond smartphones, touching themes like internet of things connectivity, data centres and increased volumes of electronics in cars, not least electric vehicles.
As a result, the chipmaker’s results improved consistently throughout last year and it ended fiscal 2020 (to 31 August) on a solid note given the disruption caused by the pandemic.
The good news for investors is that Micron is widely expected to sharply improve its financial performance this year, and into fiscal 2022, as evident from its recent results that led to a spate of analyst upgrades.
First quarter numbers published in January 2021 showed a 12% revenue rise to $5.77 billion, comfortably beating consensus estimates of $5.66 billion. Earnings per share (EPS) jumped from $0.48 to $0.78 year-on-year, again beating the $0.69 forecast.
There remained nods to caution in the statement, although that may imply potential to repeatedly outstrip expectations as the year progresses. As the business backcloth continues to improve, so earnings recovery should accelerate. EPS is expected to increase 45% this year, then almost double in 2022 to $7.93.
That would slash the already reasonable valuation, or send
the stock shooting higher. At the current $80.72, the 2021 price to earnings multiple stands at 19.6, falling to 10.2 the year after.