Micron Technology (NASDAQ:MU) has gone from strength to strength in the past couple of years thanks to the memory boom that started in mid-2016. Shares of the chipmaker have soared nicely as the rise in dynamic random access memory (DRAM) and NAND prices have rubbed off positively on its top and bottom lines.
But Micron is known to be a play on memory boom-and-bust cycles, which can put investors on a roller coaster.
Should investors keep betting on more upside at Micron, or should they take a step back because a memory-price bust could be in the cards? Here are arguments for both sides.
Pro: Micron's diversification makes it a good bet
Micron is trying hard to reduce its dependence on memory price cycles by targeting fast-growing niches like artificial intelligence, self-driving cars, cybersecurity, and video surveillance, among others. The chipmaker announced its entry into the self-driving car market last year with its LPDDR4x memory chip, which can transmit data at fast speeds thanks to a bandwidth of 100 gigabytes per second.
Such speeds should help automakers improve self-driving capabilities, since the fast transfer rates possible with Micron's high-performance memory chip will speed up the calculations autonomous cars make in order to execute real-time decisions.
Micron estimates that fully autonomous cars will require memory bandwidths of 300 gigabytes per second and above, so it is working to push the envelope with the faster GDDR6 memory specification. GDDR6 memory has faster data rates than its predecessors, with memory bandwidth speeds hitting over 800 gigabytes per second.
The good news is that Micron is set to begin mass production of GDDR6-based memory chips from the first half of this year. And it is already in partnership with potential automotive customers to deploy GDDR6-based chips for enabling Level 4/5 autonomy in self-driving vehicles.
More important, this isn't the only area that Micron is trying to tap for its memory chips. It has been supplying specialized DRAM memory chips to NVIDIA for its flagship graphics cards, and the trend should continue this year with the GDDR6 ramp. As already mentioned, GDDR6 memory is capable of supporting high memory bandwidth speeds, making it ideal for deployment in graphics chips meant for high-end gaming and cryptocurrency mining.
Con: The commoditized memory market could be a headwind
Memory chips are no more than a commodity, so their pricing is decided by the demand-supply balance. Earlier oversupply conditions in the memory market have allowed manufacturers to negotiate lower prices from suppliers like Micron. The market has favored the suppliers of late as they have kept output.
But chipmakers have been known to get greedy and boost output to capitalize on higher pricing. This eventually reduces their pricing power and causes a drop in prices. A similar scenario could soon start emerging in the DRAM market because market leader Samsung has already started mass production of GDDR6 memory.
Additionally, Samsung is reportedly in talks with China's National Development and Reform Commission to sign a memorandum of understanding to moderate DRAM pricing by increasing supply.
Meanwhile, second-ranked memory chipmaker SK hynix has already made its GDDR6 memory available to customers. So Micron's rivals might have beaten it to the market, which could also trigger a period of oversupply. As a result, the upswing in memory prices could hit a speed bump if there isn't enough demand to satisfy, and this could end Micron's terrific financial growth.
The sword of a memory pricing bust is hanging over Micron's head. But at the same time, there might be enough demand in the market to absorb a potential increase in supply thanks to expanding uses like self-driving cars and cryptocurrency mining.
Investors might be wondering about investing in the chipmaker because it has already soared so much in the past couple of years. But Micron stock still offers an attractive point of entry to take advantage of any potential upside.
The stock's trailing price-to-earnings (P/E) ratio of just 6.9 is slightly lower than the 7.1 industry average. Additionally, a forward P/E of 4.5 indicates that investors expect its earnings will get better going forward. The fact that Micron is so cheap despite its massive run over the past couple of years should be music to investors' ears, especially considering that analysts expect its earnings to increase at an annual pace of over 27% for the next five years.