Micron Technology (MU 2.20%) has achieved a long-awaited breakout. Thanks to an array of new products needing computer memory, the company has finally attained the increased sales volumes needed to hold on to gains amid volatile chip cycles.
However, Micron remains a proxy for chip prices in many regards, and how that will affect the stock price in today's tech world remains a concern. Given that volatility, let's take a closer look at whether Micron -- and its stock -- can continue to rise over the next three years.
Image source: Micron Technology.
The Micron competitive advantage
Micron has stood out as one of the few producers of memory chips. In the NAND, or flash memory space, it competes with multiple companies. However, for DRAM memory, it is the only U.S.-based producer. Worldwide, South Korean chipmakers Samsung and SK Hynix are its only competitors in that space.
For now, it happens to benefit from multiple tailwinds. On the third-quarter 2021 earnings call, CEO Sanjay Mehrotra reported record revenue in the NAND memory space. Mehrotra also predicted that supplies for both NAND and DRAM memory will remain tight for 2022. Moreover, the company reported strength in the data center, automotive, mobile, and even the long-depressed PC market.
Recent financials
This led to revenue of $19.4 billion in the first nine months of fiscal 2021, a 26% increase compared with the first three quarters of 2020. This took GAAP net income 83% higher over the same period to more than $3.1 billion.
Micron achieved a higher income by slowing the cost of revenue growth to 19% and the increase in operating expenses to 21%. Additionally, operating expenses would have increased at a lower rate if not for the $453 million in restructure and asset impairment charges related to the impending sale of its facility in Lehi, Utah, to Texas Instruments.
Also, property and equipment investments have weighed heavily during the fiscal year as Micron reinvested most of the $8.6 billion in net cash provided by operating activities. The company only generated $569 million in free cash flow over the last nine months due to an $8 billion investment in property and equipment. However, this still came out ahead of the $92 million in free cash flow generated in the first three quarters of 2020.
Moving on to the outlook for the upcoming fourth quarter, Micron projects revenue of between $8 billion and $8.4 billion. Since Micron reported just under $6.1 billion in revenue in Q4 2020, this would amount to a year-over-year revenue increase of at least 32%.
This optimism has helped boost Micron by nearly 60% over the last 12 months, taking Micron to a P/E ratio of about 21. Though the earnings multiple has fallen over the previous 12 months, the stock still trades above levels seen before the pandemic, when it typically sold for less than 15 times earnings.
MU data by YCharts.
Possible headwinds
However, both its recent growth and the outlook point to problems. Like most other tech companies, Micron did not make many projections beyond the upcoming quarter.
This serves as a more significant concern for Micron than for chip stocks outside of the memory space. To see what could happen, stockholders only have to recall how "supply and demand imbalances" affected Micron in 2018. During that time, Micron fell from an intra-day high of just under $65 per share in May 2018 to a low of approximately $28 per share by December of that year. It would not reach the $65 per share level again until November 2020.
Now, after peaking at almost $97 per share earlier this year, it has fallen to the $78 per share level, a drop of approximately 20%. Mehrotra believes the chip shortage will persist into the 2022 calendar year. Knowing that, it remains unclear whether the drop is a short-term correction or a longer-term decline. Some, like Rosenblatt's Hans Mosesmann, believe Micron Technology stock can really double -- he gave the company a $165 per share price target. Nonetheless, should the market see a sudden surplus resembling the one in 2018, Micron could trade below its current level for years if history serves as an indicator.
Micron in three years
Micron has logged significant gains over the last year, and the increasing number of devices needing memory could mean that Micron stock rises over a long-term timeframe. Additionally, if the shortage persists for 18 to 24 more months, it could boost Micron's stock during that time.
However, predictions of a shortage for two years could easily mean a chip surplus three years from now. The history of this stock points to massive sell-offs under such conditions. This does not necessarily mean that Micron stock will sell for a lower price three years from now, but it dramatically diminishes the chances of it beating the indexes.
