Micron Technology (MU 1.70%) has a long history as a chip stock. With that designation comes the inevitable volatility inherent in this cyclical industry. The company has often moved higher during a time of rising memory prices, only to collapse when memory demand dries up.
For this reason, predicting where Micron stock goes over the next year probably hinges on the expected direction of memory prices. Let's take a closer look at where analysts believe the memory market is headed over the next year.
In the most recent earnings call, CEO Sanjay Mehrotra sounded an optimistic tone on DRAM memory for 2021, a category that traditionally made up a majority of Micron's revenue. Still, that didn't stop the company from forecasting $0.47 per share in non-GAAP earnings for the upcoming Q1. This is down from $0.48 per share from the year-ago quarter.
Currently, Micron stock trades at a forward price-to-earnings (P/E) ratio of about 14. Such low multiples are not unusual for Micron, as it has sold at an average forward valuation of around 10.5 over the previous five years.
It's (kind of) different this time
Investors should continue to assume that Micron will remain a proxy for memory prices. Nonetheless, the advent of 5G, artificial intelligence (AI), virtual reality (VR), and the Internet of Things (IoT) may have brought a permanent demand increase in memory chips.
This has been evident during the most recent downturn in memory prices. The collapse of crypto prices flooded the market with chips. However, instead of Micron stock falling back to the single-digits like it did in past downturns, it held up significantly better. Micron dropped to a low of about $28 per share in late 2018 before resuming its move higher.
Micron investors also face increasing geopolitical concerns. Like many tech companies, Micron partially depends on China. In fiscal 2019, China made up approximately 15% of the company's revenue. Hence, what happens in the upcoming presidential election could influence Micron stock.
A win by President Donald Trump would mean the scrutiny of business with the People's Republic will probably continue. However, if Democratic nominee and former Vice President Joe Biden wins, this pressure may lessen as analysts perceive him as less antagonistic toward China.
Why it may rise, anyway
However, even more surprising was that the 2020 economic downturn did not hurt Micron. Since COVID-19 forced more people to work from home, interest in chip and memory rose. Moreover, much of this work may stay in the home even after the contagion runs its course.
Hence, the company appears set to move higher. At approximately $52 per share, Micron trades well above the $28 per-share low set in late 2018. Nonetheless, profit levels indicate it could turn higher. Analysts expect a 6% increase in profits this year. This might imply a slightly elevated forward multiple if not for the 102% increase in profits predicted for the next fiscal year, 2022. Investors could buy more Micron stock over the next year as they anticipate that spike in net income.
Furthermore, most of this tech trend will happen regardless of the pandemic or the course of the election. Data centers continue to become more critical, driving more demand for Micron memory chips. Additionally, as Apple introduces a 5G iPhone, the adoption of this technology could make more memory-hungry applications a reality.
Micron in one year
Admittedly, a lot can change in this industry. The uncertainty over China could continue if Trump wins reelection. Additionally, unexpected drops in demand have burned investors over the years. Thus, stockholders need to stay constantly vigilant about memory demand and prices.
Nonetheless, a 5G supercycle will likely ramp up during this time. This should spur demand for products that need more memory. With a low P/E ratio and earnings increases about to spike into the triple digits, Micron appears headed for an upward trajectory over the next year.