Will 2017 Be Micron Technology, Inc.'s Best Year Yet?

Image source: Getty Images.

Micron Technology (MU -0.94%) shares have gained a market-stomping 57% in 2016. Can the memory chip specialist build on this success with another fantastic performance in 2017?

First, I have already taken a look at the potential downside for us Micron investors. In short, the risks involved in owning Micron next year are significant but also limited. We won't see any record-breaking drops next year, even in the worst-case scenario of another full-blown price war in the memory industry.

On the upside, both DRAM and NAND memory prices have stabilized dramatically in recent months. Both Micron's management and independent market analysts agree that chip prices should remain firm over the next several months. Since Micron (and all other chip manufacturers) always works on pushing down the cost of making each chip, stable prices lead to wider margins over time.

That's what the memory business looks like right now, in a rare and welcome break from the sector's history of raging price wars. As long as these conditions hold true, Micron's profits and cash flows will continue to rise. In a perfect world, that inevitably leads to higher share prices.

The valuation angle

So how much room is there for more gains on top of that tremendous 2016 showing?

Quite a bit, actually.

From a historical point of view, Micron traded at more than $36 per share just two years ago. Climbing back to that level would work out to at least a 60% gain, starting at today's prices.

If you think that can't be done, you could look back at the much faster rise in 2013 and 2014 for some velocity guidance. The price swings in this crazy industry may not be very predictable, but they sure know how to bring the heat in both directions. So Micron could very well jump back to $36 in a single year, if recent history is any indication.

How about traditional valuation metrics? Let me compare Micron to some other veterans in the chip industry:

Data source: YCharts.

I'm not necessarily saying that Micron deserves to trade at the same multiples as Intel or Qualcomm, of course. Both of these sector peers are much larger than Micron in terms of annual sales, various types of profit, and market caps. Intel dominates the market for central processors, and Qualcomm holds a similar position in the field of wireless communications, while Micron is only the third-largest player in a highly volatile sector. So yeah, Micron probably deserves a risk-related discount.

But the company is on an upward trend right now, and that crazy memory market has settled down significantly in recent years. Several brutal rounds of cyclical shakeouts have led to the largest memory providers swallowing up all the minnows, and Micron is one of the rival-eating survivors. Frankly, I'd be shocked to see another price war in the next couple of years.

Based on the table above, you could give Micron a 60% price boost right now and the stock would still look reasonably cheap in the context of large sector peers. Watch Micron get to work on earning back that rebate, and stock prices could surge in a hurry.

The key issue here is memory chip pricing, based on the balance between supply and demand in that market. Supply is tighter than demand right now and should remain so for at least a good chunk of 2017 as well.

What's next?

So yeah, I think that this stock will climb even higher next year. Will it be the best year ever? Probably not -- Micron set a high bar by tripling in 2013 -- but still a very healthy performance indeed.

I'll certainly keep a close eye on Micron next year. A 60% gain would place the stock close to what I'd consider fair value in a best-case memory market scenario. At that point, it just might be time to sign off and move my Micron capital to another stock with a longer runway for growth ahead of it.

But right now, I'm a happy shareholder. The next year is looking good from where I sit.