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A Top Growth Stock You Don't Want to Miss

By Harsh Chauhan - Updated Jul 7, 2020 at 10:36AM

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This chipmaker has pulled off an impressive turnaround in difficult times.

Micron Technology (MU 3.80%) has staged a terrific comeback in 2020 after starting the year on its back foot. The computer memory specialist struggled with unfavorable demand/supply dynamics in 2019 that tanked its price, and the novel coronavirus added more uncertainty into the mix earlier this year.

But Micron's latest quarterly results are proof that its turnaround is officially complete. The chipmaker crushed Wall Street's fiscal 2020 third-quarter expectations and delivered even better guidance, which is impressive considering that spot memory prices have weakened lately. But with Micron stock now up nearly 25% since April, will it be a good idea to go long? Let's find out.

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Micron is stepping on the gas

Micron's revenue increased by 13% year over year during the quarter. The company anticipates revenue of $6 billion this quarter at the midpoint of the guidance range. That figure would be a 23% jump over the prior-year period's top line of $4.87 billion.

Revenue isn't the only improvement Micron investors should look forward to. The company expects a non-GAAP (adjusted) gross margin of 35.5% in the current quarter -- a huge leap over the prior-year period's figure of 30.6%.

For comparison, Micron's third-quarter non-GAAP gross margin of 33.2% was significantly lower than the year-ago period's figure of 39.3% thanks to tepid memory prices. Not surprisingly, its adjusted earnings of $0.82 per share were significantly below the year-ago period's earnings of $1.05 per share.

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All that is about to change soon. The gross margin forecast for the current quarter makes it clear that Micron is enjoying a favorable pricing environment now. CFO David Zinsner explained over the latest earnings conference call that Micron is witnessing improvements in average selling prices (ASPs), as well as in shipments of DRAM (dynamic random access memory) and NAND flash.

The company is looking at adjusted earnings of $1.05 per share this quarter, a big improvement over the prior-year period's earnings of $0.56 per share. We can safely conclude that Micron is all set to kick up a notch in the current quarter. But don't be surprised to see the company sustain its momentum beyond the short run, as it's sitting on some powerful growth drivers.

Datacenter, mobile, and gaming could be big tailwinds

Data center and smartphone markets drove Micron's impressive quarterly performance and outlook.  The company anticipates that these markets will sustain that momentum in the second half of 2020. Management also expects some more catalysts to come into play. CEO Sanjay Mehrotra shed some light on these growth drivers:

First, we expect the data center outlook to remain healthy. Second, we expect smartphone and consumer end-unit sales to continue to improve, accelerating inventory consumption across the supply chain. And third, new gaming consoles will drive stronger DRAM and NAND demand.

The roll-out of 5G wireless networks, for instance, is going to give Micron a nice boost. The company's mobile business unit, which produced nearly 28% of its revenue last quarter, witnessed annual growth of 30%. There are compelling reasons to believe that Micron's mobile business will keep getting better thanks to the impending volume growth of 5G smartphones, which are expected to use more memory than the ones currently on the market.

Meanwhile, Micron's storage business also turned in a standout performance with 25% annual revenue growth to $1 billion, accounting for just over 18% of the total top line. An uptick in demand for data center solid-state drives (SSDs) drove the segment's growth. 

The demand for SSDs is likely to pick up further thanks to growing adoption in data centers and the launch of next-generation gaming consoles from Sony and Microsoft that will ditch traditional hard drives. A third-party estimate pegs the growth of the SSD market at 14.7% through 2023, setting the stage for further growth in Micron's storage business.

Should you buy it?

Micron Technology won't be running out of gas anytime soon, as the demand for memory is likely to improve thanks to the aforementioned trends. But investors looking to board this gravy train now will have to pay a premium.

Micron is trading at nearly 25 times earnings, which is nearly double the five-year average price-to-earnings (P/E) ratio of 13.6. However, a forward earnings multiple of 9.5 indicates bottom-line growth. That isn't surprising considering the margin improvements the chipmaker is looking at in the current quarter, as well as the favorable demand environment.

Micron Technology seems worth the premium, as it's on track to deliver impressive growth in the wake of the COVID-19 pandemic. This is a growth stock worth holding on to even after an impressive rally over the past few months.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and recommends the following options: short January 2021 $115 calls on Microsoft and long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

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