Technology stocks have been hammered lately thanks to concerns about their potential overvaluation, but that hasn't affected memory specialist Micron Technology's (MU 0.41%) impressive run.
Micron's reasonable valuation and its potential to step on the gas in the coming months on the back of favorable memory market dynamics may have kept investors from pushing the sell button, even at a time when some other big names are losing ground on the market. In fact, these are the two reasons why Micron Technology is a stock worth buying right now, as it could keep delivering more upside even if there's a prolonged sell-off in the broader market.
Micron Technology remains relatively cheap
The tech-heavy NASDAQ-100 Technology Sector Index's price-to-earnings (P/E) multiple stood at nearly 40 at the end of 2020, up significantly from 27.3 at the end of 2019 as investors bought tech stocks hand over fist amid the novel coronavirus pandemic. Micron, however, is relatively cheap, with a trailing P/E ratio of 33.5, while the forward earnings multiple stands at less than 20.
Micron's earnings are expected to grow at a terrific pace, as the lower forward P/E ratio indicates. According to consensus estimates, the memory specialist's earnings could jump to $4.18 per share in the current fiscal year from $2.83 in the previous year. Analysts also expect the company's earnings to zoom higher in the next fiscal year to $7.91 per share -- and the chipmaker could hit those forecasts on the back of higher revenue and fatter margins.
Wall Street expects Micron's revenue growth to step on the gas over the next couple of years. Micron's revenue fell in fiscal 2020, which ended on Sept. 3, 2020, but it is expected to deliver a 17.4% jump this fiscal year. Analysts are forecasting 25.5% top-line growth at Micron in fiscal 2022. But Micron is likely to exceed even those expectations, as recent developments indicate.
The company just raised its revenue outlook for the fiscal second quarter to a range of $6.20 billion to $6.25 billion, a nice bump over its prior expectation of revenue between $5.6 billion and $6 billion. Micron has also raised its adjusted gross margin guidance to a range of 32%-33% from the earlier expectation of 30% to 32%. The earnings per share (EPS) forecast has also gone up significantly, with Micron forecasting EPS between $0.93 and $0.98 now, compared to its earlier range of $0.68 to $0.82.
The potential acceleration in Micron's growth and its relatively attractive valuation compared to that of the broader index could be the reasons why investors are not dumping the stock at a time when other tech stocks are getting battered. As such, it wouldn't be surprising to see Micron stock shoot higher, especially considering the tailwinds it is enjoying.
Here's why Micron's growth could take off
Micron shares recently received a nice shot in the arm after a couple of positive Wall Street research notes that point toward an environment of higher memory prices.
Morgan Stanley analyst Joseph Moore is seeing an upwards trend in contract prices, which is not surprising considering the supply shortage of memory chips. And Micron rival SK Hynix has already said that memory chips are likely to be in high demand this year and that there may not be enough supply to meet that demand.
Hynix predicts a 20% jump in DRAM (dynamic random-access memory) demand this year, driven by the rollout of 5G networks and new data centers, which will create the need for mobile and server memory chips. Similarly, the company believes that an increase in demand for data center storage could lead to a recovery in the NAND flash business in the second half of the year.
These factors are going to drive higher margins and stronger revenue for memory specialists such as Micron Technology, which has historically thrived during times of high memory prices. A similar trend is likely to unfold this year, which is why Micron Technology could sustain its terrific momentum and remain a top growth stock in 2021 and beyond.