Shares of Micron Technology (MU +0.59%) have shot up to 20-year highs this fall thanks to a couple of price target upgrades by Wall Street analysts, who predict that the memory specialist has more upside to offer on the back of higher demand from data centers and 5G smartphones.
Deutsche Bank and Mizuho Securities have raised their per-share price targets to $70, indicating an upside of around 10% from Micron's current stock price. But it wouldn't be surprising to see the memory specialist break higher and surpass Wall Street's expectations. Let's see why.
A favorable DRAM environment will be a tailwind for Micron
Micron Technology gets most of its revenue from the compute and networking business unit (CNBU). This segment supplied nearly 43% of Micron's total revenue in the previous fiscal year, but its performance wasn't good enough, as revenue fell nearly 8% over the prior year to $9.2 billion.
Micron attributes the segment's weakness to a decline in the price of dynamic random access memory (DRAM) on account of an unfavorable supply-demand equation. The novel coronavirus outbreak disrupted Micron's supply chain and dented demand for its products because of shutdowns across the globe.
But the CNBU business gained impressive momentum by the end of fiscal 2020, which ended on Sept. 3, 2020. Its revenue shot up 59% year over year during the fourth quarter of fiscal 2020 on account of strength in cloud servers and the client business, which benefited from an increase in sales of work-from-home related infrastructure.
According to Micron's recent 10-K filing, the cloud server business has witnessed "significant growth in 2020 due to strong demand from the work-from-home and e-learning environments, video streaming, and significant increases in e-commerce activity around the world." Micron anticipates these tailwinds to continue into 2021, as the rollout of 5G networks and the proliferation of artificial intelligence (AI) and machine learning are likely to drive an increase in demand for server content.
Mizuho analyst Vijay Rakesh has boosted his Micron price target based on the anticipated strength in data center demand. He predicts that tech giants such as Microsoft and Facebook will enhance their data center investments next year and create the need for more server DRAM. Research and advisory firm Gartner expects data center infrastructure spending to grow 6% in 2021 after a 10% decline in 2020 because of COVID-related restrictions.
Image source: Getty Images.
Moreover, data center operators are expected to transition to faster DDR5 DRAM beginning in the second half of 2021. Micron has already started sampling its DDR5 modules with server customers -- and it could witness strong demand on this front, as the new chips could reportedly deliver an 85% bump in performance compared to the current-generation DDR4 DRAM offerings.
Throw in other catalysts such as 5G smartphones, an uptick in PC demand, and the launch of new consoles, and Micron should witness stronger DRAM demand in 2021. Not surprisingly, the company anticipates 20% growth in industry DRAM bit demand next year. Micron management also points out that the transition to a new DRAM standard could keep bit supply growth lower than the projected growth in demand in 2021.
About to step on the gas
Micron Technology is likely to enjoy a favorable DRAM pricing environment next year. That should bode well for the company, as DRAM accounted for 68% of its total revenue in fiscal 2020. The segment's revenue was down 14% over the prior year due to supply-demand challenges, but Micron looks well-placed to put that disappointment behind it.
Micron's outlook for the current quarter calls for $5.2 billion in revenue, a slight increase over the year-ago period's top line of $5.14 billion. But favorable end-market developments could help Micron post better numbers and send the stock to new highs. Moreover, analyst estimates compiled by Yahoo! Finance suggest that Micron's earnings growth could step on the gas over the next two fiscal years.
So it would be a good idea for investors to take a closer look at this tech stock, as it trades at less than 18 times forward earnings right now and looks capable of breaking higher.
