Micron Stock Is a Buy as the Global Chip Shortage Continues

With a global chip shortage expected to last all year, Micron Technology (MU -0.94%) is riding high right now. The company reported during its fiscal 2021 second-quarter update (the three months ended March 4, 2021) that it's operating near full capacity to keep up with its customers' needs as effects from the pandemic and surging demand for electronic devices has sales back in strong growth mode. Sooner or later, supply will catch up and this upcycle for Micron and other semiconductor manufacturers will moderate. But for now, Micron is a great buy as it closes back in on record revenue. 

How did this chip shortage happen?

In recent months, production of everything from smartphones to automobiles has been throttled by a global shortage of semiconductors -- the building blocks of all things electronic. These basic commodities for tech are a cyclical affair. Years of booming sales and high prices can be followed by lean periods when demand falls. Such a downturn started back in 2018 after Micron reported new all-time highs for sales and profits.

Data by YCharts.

These cycles are normal for manufacturing, but the downturn was exacerbated by the U.S.-China trade war. Global supply chains had to be rerouted to account for tariffs and embargoes on sales to certain companies. Then COVID-19 struck, temporarily shuttering chip foundries. And chip companies' customers (like automakers, for example) slowed their purchasing of new hardware and worked down existing inventory during 2020 to manage their cash flow.

Image source: Getty Images.

Demand for electronic devices, autos, and industrial equipment came roaring back, but all the aforementioned effects added up to a global shortfall in supply. For a company like Micron, there could be worse situations. Operating at or near max capacity means greater efficiency, and it appears the global shortage will keep sales pushing higher for the rest of the year. And new technologies like artificial intelligence systems in data centers, the rollout of 5G mobile networks, and more powerful consumer devices mean this uptrend could have legs for a while. Micron had a great Q2, and forecasts Q3 fiscal 2021 revenue and adjusted earnings per share will increase another respective 31% and 98% from a year ago to $7.1 billion and $1.62 per share.

Data source: Micron Technology. YOY = year over year. 

Offloading a drag on the bottom line

Micron has done a lot of work to tighten up operations and get more efficient, and it's paid off. The chipmaker remained profitable (granted, just barely) throughout the last downturn. But there's always room for improvement. Micron bought out Intel's (INTC 1.74%) 49% stake in the 3D XPoint (a new type of architecture for memory chips) joint venture between the two companies back in 2019 for $1.5 billion. However, as Micron explained on a call prior to the Q2 report, 3D XPoint hasn't really taken off and industry needs are moving in a different direction. Underutilization at the Lehi, Utah, plant that makes 3D XPoint memory has been a $400 million-a-year drag on Micron's operating profits.

The decision was thus made to abandon 3D XPoint and sell the Lehi operation. Given the global shortage in chip supply, there's a good chance someone out there can repurpose the fab for other uses. Micron said on the Q2 call it's in talks with potential buyers and expects a sale by the end of calendar year 2021. This should help Micron recoup some losses from its purchase -- not to mention further boost the bottom line as those underutilization charges go away.  

Given expected top- and bottom-line growth and Micron's continuous work to optimize its memory chip fabrication, shares look like a reasonable deal at 25 times trailing 12-month adjusted earnings per share. Bear in mind this current upcycle will eventually moderate and give way to another downcycle, but for now that's not on the horizon. I remain a buyer of Micron right now.