Why Micron (MU) Deserves a Place in Investors' Portfolio?

Stocks showing momentum and having enough prospects are the ones that investors like to add to their portfolio. Below we have evaluated one such technology company – Micron Technology, Inc. MU, which has gained solid momentum in the last six months and seems to have potential for further growth.

The stock has been clocking solid returns over the last six months and has gained approximately 63.4%, outperforming the Zacks Electronics-Semiconductor industry return of 20.2%.

Let’s look at the reasons behind Micron’s solid momentum.

What’s Driving the Stock

Micron offers both DRAM and NAND products. While DRAM chips are the key components in PCs, NAND flash chips are crucial for portable electronic devices. The company is on a growth trajectory, gathering momentum from its positive earnings surprise history and strong fundamentals.

It posted a positive earnings surprise in the last four quarters, with an average surprise of 31.5%. Though the company reported non-GAAP loss per share in fourth-quarter fiscal 2016, it was narrower than the year-ago quarter, as well as the Zacks Consensus Estimate.

MICRON TECH Price, Consensus and EPS Surprise

MICRON TECH Price, Consensus and EPS Surprise | MICRON TECH Quote

Additionally, the company’s fourth-quarter revenues came ahead of the Zacks Consensus Estimate and have marked 11% growth on a year-over-year basis. It revealed that quarterly results were mainly benefited by pricing improvement in the DRAM memory chip market and recovery in the PC market.

Going forward, the recent optimism surrounding the stock can also be attributable to the company’s recently raised outlook for the first-quarter of fiscal 2017. The optimistic guidance is driven by improvements in average selling prices (ASP), particularly for DRAM. Apart from this, the company also revealed that its overall demand continues to be healthy, while it forecasts a slow industry supply growth for the next few quarters.

The improving prices for DRAM and NAND chips make us hopeful about the company’s near-term performance. Per various sources, DRAM and NAND prices have improved primarily due to a better product mix optimization and stronger-than-expected demand for PCs, servers and mobiles.

Furthermore, the company is expected to benefit from strong demand for NAND flash memory chips, which are used in smartphones and tablets. Driven by new tablet products and greater adoption of solid state drive (SSD), total demand in the NAND flash memory industry could surpass manufacturing capacity, leading to a periodic shortage and higher pricing in the near term.

It should be noted that Micron has been expanding in SSD storage, due to the decline in the PC market. Notably, SSDs are faster and more energy efficient than traditional hard drives. These are also used in servers due to lower latency, thereby facilitating faster response to real-time applications.

In an effort to expand its SSD product portfolio, last year, the company partnered with Seagate Technology plc STX to supply a significant portion of the latter’s NAND requirement. In return, Seagate shares its SAS SSD technology with Micron – a key technology that the latter lacks in the enterprise SSD market. We believe that the deal will expand Micron’s high-value enterprise SSD portfolio.

Additionally, Micron recently revealed that it is on track to complete the acquisition of Inotera by Dec 6. Considering the current market conditions, the company anticipates the buyout to be accretive to its DRAM gross margin, earnings per share and free cash flow.

According to the company, the acquisition will also have some operational benefits, leading to efficient management of investment levels and cadence followed by alignment with global manufacturing operations.

The company anticipates the aforementioned factors to also have a positive impact on its second-quarter fiscal 2017 results.

Bottom Line

Looking at the improving selling prices for DRAM and strategic initiatives of expanding in the SSD market, we consider that Micron is one such technology stock which would be worthy of remaining in investors’ portfolio.

It should be noted that the company currently trades at a forward P/E multiple of 13.8x, which is significantly lower than the Zacks categorized Electronics-Semiconductor industry average of 17.3x.The ratio, which is obtained by dividing a stock’s current market price with its historical or estimated earnings, measures how much an investor needs to shell out per dollar of earnings. Therefore, lower the P/E of a stock, the better for a value investor.

Hence, we believe there is still much momentum left in this Zacks Rank #2 (Buy) stock, which is quite evident from its VGM Score of “B” and fiscal 2017 and 2018 earnings growth rate of 2400% and 35.2%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The stock has grabbed the spotlight with striking performances on the back of solid earnings results and strong growth projections. Keeping this in mind, we believe investing in this stock would yield strong returns in the short term.

A couple of other stocks worth considering in the broader technology sector are Cirrus Logic Inc. CRUS and FormFactor Inc. FORM.

Sporting a Zacks Rank #1, Cirrus Logic witnessed upward estimate revisions in the last 60 days and surpassed the Zacks Consensus Estimate thrice in the trailing four quarters, with an average positive surprise of 53.68%.

Carrying a Zacks Rank #2, estimates for FormFactor also moved up in the last 60 days. It surpassed the Zacks Consensus Estimate thrice in the trailing four quarters, with an average positive surprise of 21.97%.

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