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Shares of Micron Technology (MU 0.16%) were on fire in 2021. Despite facing some volatility amid a selloff in tech stocks, it has significantly outperformed returns in the broader market, and the company’s latest quarterly results clearly show why.
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The memory specialist’s fiscal second-quarter 2021 revenue and earnings topped Wall Street estimates and came in at the upper end of Micron’s guidance range. Additionally, the company’s third-quarter forecast beat expectations and indicates that the company isn’t running out of steam anytime soon, making it an ideal choice for investors looking to buy growth stocks right now. Let’s take a closer look at the reasons why Micron remains a solid buy, even though its stock has more than doubled in the past year.
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In the second quarter of fiscal 2021, which ended March 4, Micron Technology’s revenue rose 30% year-over-year to $6.24 billion and adjusted earnings more than doubled to $0.98 up from $0.45 per share a year earlier. The chipmaker also enjoyed impressive margin growth thanks to rising memory prices and falling costs. Its non-GAAP gross margin increased by 3.8 percentage points to 32.9% compared to the previous year.
All of those numbers were at the high end of Micron’s recently updated guidance range, which calls for earnings of $0.93 to $0.98 per share on revenue of $6.20 billion to $6.25 billion. Its adjusted gross margin is expected to be between 32% and 33%.
The good news for Micron investors is that the company’s margin growth is expected to accelerate. The chipmaker expects a non-GAAP gross margin of 41.5% this quarter, which would be a huge jump from 33.2% in the prior period. In fact, Micron’s gross margin performance could improve even more this fiscal year as its DRAM (dynamic random access memory) business is expected to see more cost reductions than previously expected.
At the same time, Micron’s management predicts that the supply-demand imbalance in the DRAM and NAND flash memory markets will continue to worsen, so manufacturers may raise prices further. “Due to strong demand and limited supply, the DRAM market is currently facing a severe supply shortage, leading to a rapid increase in DRAM prices,” says CEO Sanjay Mehrotra. “We see the DRAM market continuing to tighten throughout the year.”
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The DRAM segment accounted for 71% of Micron’s sales in the last quarter, so the favorable supply and demand dynamics in this market could be a tailwind for the company. Micron expects demand for DRAM bits to grow 20% in 2021, higher than previous expectations for growth in the teens.
Demand for NAND flash bits is expected to grow in the low to mid 30% range, exceeding the company’s previous forecast of 30%. According to Micron, NAND prices are expected to remain stable in the near term, but efforts by memory industry players could lead to an improved price environment. Therefore, Micron predicts lower than industry supply growth in 2021 for both DRAM and NAND.
The positive effect of all these tailwinds can be seen in Micron’s guidance. The chipmaker expects revenue of $7.1 billion in the current quarter, a jump of more than 31% compared to the same quarter last year. It’s delivering huge margin growth, and it’s no surprise that the company expects adjusted earnings per share to jump to $1.62 this quarter from $0.82 per share a year ago.
Micron Technology will generate strong top-line and bottom-line growth in the near term, but there is reason to believe that the company will enjoy a favorable demand and pricing environment over the long term.
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Micron’s management predicts that long-term demand for DRAM bits will grow by a percentage in the mid-teens per year. Demand for NAND bits is expected to grow at a compound annual rate of 30% over the long term. Rising demand for memory chips used in data centers, smartphones, personal computers, graphics processors, and vehicles is expected to fuel this impressive long-term growth.
Given that memory industry players have scaled back capital spending over the past three years, the market is likely to remain undersupplied for some time to come. IC Insights estimates Micron has cut DRAM spending to $3.6 billion in 2020 from $4.4 billion in 2018, while Samsung reportedly cut it from $8.1 billion in 2018 to $4.9 billion last year the investment cost.
The huge increase in demand did not encourage the participants to significantly increase their investments. Micron, for example, has budgeted $9 billion in capital spending for fiscal 2021, an increase of just 13% year-over-year, which pales in comparison to the expected huge increase in demand for bits.
In conclusion, Micron Technology is poised for multi-year growth due to favorable conditions in the memory market. All of this makes Micron an ideal bet for investors looking to buy growth stocks to hold onto for the long term, especially as it trades at a reasonable 18x earnings despite its rapid growth rate.
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Why should you avoid Micron stock even though Micron has good prospects as a company thanks to AI, servers have just taken over smartphones in this key market? The 2 Biggest Stocks to Buy That Can Double Your Money Better are Semiconductor Stocks: Micron vs. TSMC
10 years ago I wouldn’t have touched this stock with a 10 foot pole – now I can’t stop buying the 2 stocks that could join Apple, Alphabet and Microsoft in the $1 trillion QuantumScape club, just do something about Tesla. That’s because US Bancorp shares are down 15.1% this week
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