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A Top 5G Stock to Buy Before the Year Ends

By Harsh Chauhan – Oct 9, 2020 at 12:00PM

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Higher memory capacity in 5G smartphones and data center upgrades could be big catalysts for this chipmaker.

Micron Technology (MU -1.13%) ended fiscal 2020 on a high with a solid set of fourth-quarter results for the three months ending on Sept. 3., but investors were far from impressed by the company's guidance.

Micron's revenue jumped 24.4% from the prior-year quarter to $6.06 billion, and gross margin improved 5.5 percentage points thanks to an improvement in the memory market's dynamics. But lower spending on information technology (IT) infrastructure and further restrictions on shipments to Huawei (which supplies 10% of the company's revenue) are going to be headwinds for Micron in the short term. As a result, the company expects its top line to remain nearly flat year-over-year this quarter at $5.2 billion.

While that's a major step down from Micron's performance last quarter, there's one major catalyst that could help the chipmaker regain its mojo as the fiscal year progresses.

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Micron is all set to win big from 5G smartphones

Micron management explained at length how the deployment of fifth-generation (5G) wireless networks will have a positive impact on its various businesses during the latest earnings conference call.

For instance, the memory specialist anticipates a huge jump in shipments of 5G smartphones this year that could lead to a massive jump in demand for its mobile NAND and DRAM (dynamic random access memory) chips. The company forecasts 500 million 5G smartphone shipments in 2021, compared to an estimated 200 million units this year.

Micron estimates that this impressive volume growth will be accompanied by higher memory and storage capacities. The average NAND flash storage capacity of a smartphone is expected to jump to a whopping 142 gigabytes (GB) in 2021, compared to 43 GB in 2017. Similarly, the average DRAM content of a smartphone is expected to increase to 4.8 GB next year from 2.7 GB in 2017.

Other third-party estimates predict a 50% increase in DRAM usage by 5G smartphones. All of this bodes well for Micron, as smartphones account for 40% of overall DRAM demand as per Cowen's estimates, paving the way for an uptick in memory demand in 2021 as more 5G devices hit the market.

Micron's mobile business unit (MBU) supplied $5.7 billion in revenue last fiscal year, accounting for almost 27% of the total revenue. The novel coronavirus pandemic dented this business last year as smartphone demand remained weak, resulting in an 11% decline in revenue from fiscal 2019. But the future holds greater promise, and it wouldn't be surprising to see this business make a comeback in the forthcoming quarters.

Looking beyond smartphones

Micron's mobile business isn't going to be the only beneficiary of the 5G rollout. Micron anticipates that the next-generation networking technology will positively impact the company's networking business as well.

Micron points out that data centers will be transitioning to DDR5 memory in the second half of the current fiscal year. The chipmaker says that it has started sampling DDR5 server DRAM to customers already.

According to Micron, DDR5 is the "most advanced" form of DRAM, and could boost the memory performance of data center servers by as much as 85% compared to DDR4 memory. This shift to a new memory technology will help data centers tackle the increased data volume created by 5G networks, which are expected to power a wide range of applications from the Internet of Things to artificial intelligence.

Ericsson estimates that global mobile data traffic could increase five-fold from 2019 to 2025, with 5G accounting for 45% of the overall traffic at the end of the forecast period. As a result, data center operators will have to upgrade equipment to process the increased data flow, setting the stage for an increase in DRAM and enterprise storage demand.

Micron's compute and networking business is its largest segment, with $9.2 billion in revenue last year -- nearly 43% of the total revenue. This segment did well last quarter thanks to several catalysts, such as an increase in demand for work-from-home infrastructure, gaming console-related demand, and cloud strength.

Most of these catalysts are here to stay, as the new gaming console cycle is just beginning and the shift toward remote work is expected to continue. As such, the near-term weakness in demand shouldn't last for long, as Micron is sitting on catalysts such as 5G that could drive growth in the long run. That's why investors looking to get into a top 5G stock this year should have Micron on their radar -- it trades at less than 20 times trailing earnings, and looks set to step on the gas in 2021.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Micron Technology Stock Quote
Micron Technology
$55.12 (-1.13%) $0.63
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Telefonaktiebolaget LM Ericsson
$6.12 (-1.13%) $0.07

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