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Is It Time To Cash In Your Big Gains On Micron Technology, Inc?

Image source: Micron Technology.

I bought shares of Micron Technology (NASDAQ: MU  ) in the summer of 2011. At the time, the memory chip maker was battling through Japanese courts to secure a game-changing buyout -- and the final outcome was far from certain.

Nearly three years later, Micron is the proud owner of bankrupt rival Elpida. The acquisition makes Micron the second-largest memory producer in the world, just behind market leader Samsung. Micron is now a giant, standing strong in the rubble of a massive industry consolidation. Unit prices have stabilized thanks to Micron's foot on the throttle and brake pedal of the global production pipeline.

My original investment thesis has played out to a T, and it shows in the stock's fantastic returns -- most of it materializing after the Elpida buyout's closing:

MU Chart

MU data by YCharts

In short, I've made out like a bandit. With a 179% return in 33 months, Micron stands shoulder to shoulder with Netflix (NASDAQ: NFLX  ) as my most profitable current holding. Netflix has also delivered a 179% return in roughly 3 years, driven by a strong rebound from the Qwikster debacle in 2011. For Micron, I simply held my horses while the courtroom drama worked itself out. With Netflix, I bought more near the bottom, while critics gloated and other investors panicked.

I'm convinced that the Netflix story is still in its infancy, and that the real payoff for holding that stock is yet to come. I'm nowhere near selling a single share.

But what about Micron?
Like I said, the original Elpida-based investment thesis has already played out, and the stock soared as expected. That's always fun to see, but happy endings raise their own questions.

Is it time to cash in my Micron chips, or is this another long-term winner with a huge runway up ahead?

Wall Street analysts still like Micron's chances to beat the market. The average one-year price target stands at $28 today, leaving nearly 30% headroom for short-term growth. That is, assuming that the average analyst's assumptions and analysis are on target.

The Greek chorus of Street firms sings about stable pricing and smart supply side management. Those are my thoughts exactly, and it's how Micron's surging shares got this far.

On top of that, some of them see expanding price-to-earnings multiples even as the fundamental earnings base grows. That's because Micron's pricing power may not yet have been fully appreciated by most Micron investors.

These two charts seem to support that argument:

MU EBIT Margin (TTM) Chart

MU EBIT Margin (TTM) data by YCharts

MU PE Ratio (TTM) Chart

MU P/E Ratio (TTM) data by YCharts

Micron is indeed growing its earnings very quickly, not to mention experiencing a tremendous surge in free cash flows. And yet, the stock now sells for less than 10 times trailing earnings.

It's still a high-octane growth stock, but priced like a sleepy value play.

So it's not like Micron's stock has priced itself out of reach -- despite the recent share price gains. Forget about analyst forecasts, this company is executing like a machine and delivering on its promises. I'll buy the "expanding multiples" theory at face value, and I'm very comfortable holding on to my Micron shares at the end of the day.

I'm doing it under a brand new thesis, of course.

What I'm looking for in Micron, v2.0
I'll keep a close eye on Micron's execution, particularly how it manages the manufacturing flow into the separate DRAM and NAND Flash memory markets. The company is currently shifting some of the acquired DRAM capacity from Elpida into more profitable NAND production.

If done correctly, Micron's margins should stay strong for the foreseeable future, giving investors a chance to catch up to the increasing value of Micron's business.

So I'll keep an eye on Micron's margins to make sure that management keeps executing properly. And I'll keep another eye on valuation ratios, particularly price to earnings and price to free cash flows. If Micron's shares climb up to industry-standard P/E ratios around the 20x trailing earnings mark, it's time to reassess this analysis again.

But by then, my Micron gains may have doubled again -- or more. So I'm in no hurry to get there.

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Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 07, 2014, at 6:13 PM, danialwilson wrote:

    Micron Technology reported its second quarter earnings for fiscal 2014 and it beat both revenue and earnings per share estimates, and that, coupled with positive market trends in the coming years, means the company can look toward a strong future

  • Report this Comment On April 07, 2014, at 7:47 PM, DalePlourde wrote:

    MU is a bargain, as a value investor who likes as minimal risk as possible I like MU's low price to book value of 2.5 and forward PE of about 7.5, combined with MU's positive growth momentum going forward. I bought in the teen range and will continue to hold. I did not sell at 25 as I am confident based on management's current performance MU will continue to execute at a very high standard.

    I also like management's focus on integrity which they write of on their website, via producing high quality products and treating customers with honesty and integrity, which is good character but also key to retaining and growing a strong customer base which MU is. (I have found they treat investors respectfully to when I email to ask questions or make suggestions such as re: a dividend)

    I agree with the author as mentioned MU is executing at a high standard with 4 now consecutive strong/decent Q's, and growing operating revenue. I am confident we will see this as a pattern, with 2014 Q3 the next solid Q.

  • Report this Comment On April 07, 2014, at 8:54 PM, annaarron wrote:

    The stock price of Micron Technology, Inc. is currently up almost by 4%, after the company announced its financial performance for the second quarter of its fiscal 2014.

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Anders Bylund

Anders Bylund is a Foolish Technology and Entertainment Specialist. Where the two markets intersect, you'll find his wheelhouse. He has been an official Fool since 2006 but a jester all his life.

Hypoallergenic. Contains six flavors not found in nature. Believes in coyotes and time as an abstract.

Follow Anders on Twitter, LinkedIn, and Google+.

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