Micron Technology (MU 4.59%) stock has dipped sharply of late, losing over 12% of its value in the past week as Wall Street sentiment regarding the memory market's prospects has taken a turn for the worse.
A market research report from TrendForce projecting a decline in the price of dynamic random access memory (DRAM) in the fourth quarter of 2021 and a downgrade by a Morgan Stanley analyst has weighed heavily on Micron stock. Analyst Joseph Moore has slashed his Micron price target by $30 to $75 a share, indicating limited upside from current levels.
Moore estimates that the memory market's dynamics could turn unfavorable and hurt Micron. However, a closer look at the memory industry's supply-demand scenario indicates that the chipmaker could continue witnessing robust demand, especially with a strong catalyst such as 5G smartphones in tow.
Let's see why the market may be getting overly negative about Micron stock.
Micron's DRAM business will be powered by 5G smartphones
TrendForce points out that PC manufacturers have stocked high levels of DRAM inventory so that they don't run into shortages. At the same time, the reopening of offices and educational institutions thanks to the removal of COVID-19 restrictions could reduce the demand for notebook computers. As a result, TrendForce estimates there will be downward pressure on PC DRAM pricing in the fourth quarter, leading to a quarter-over-quarter price drop of up to 5%.
However, there's one area of the DRAM market where demand will continue to explode -- smartphones. TrendForce had reported at the end of 2020 that mobile DRAM accounts for 40% supply of the overall DRAM market, way higher than the 13% share of PC DRAM. The good news for Micron is that mobile DRAM demand is growing at an impressive pace in the 5G smartphone era.
Counterpoint Research recently pointed out that mobile DRAM revenue rose by an impressive 30% year over year in the first quarter of 2021 thanks to the increasing memory density of 5G smartphones. The company estimates that the average DRAM capacity in smartphones jumped 21% year over year during the quarter to 5.3 gigabytes (GB).
It won't be surprising to see smartphone DRAM consumption increase further as the share of 5G smartphones increases. IDC estimates that 5G smartphones would account for 40% of the global smartphone volumes this year, with the share expected to reach 69% by 2025. Given that 5G devices are using more memory compared with their 4G predecessors, there's a strong possibility that the average DRAM capacity per smartphone will head north.
Micron estimates that flagship and high-end 5G smartphones could be deploying at least 8 GB of DRAM, compared with 6GB in 4G smartphones. Meanwhile, mid- to low-end 5G smartphones could sport at least 6 GB of DRAM over the 2 GB or 4 GB configurations in 4G phones. As a result, Micron's mobile business should continue to enjoy impressive growth.
Micron's mobile business unit (MBU) recorded 31% year-over-year revenue growth in the fiscal third quarter to $2 billion, producing 27% of its total revenue. It is worth noting that Micron's mobile revenue had doubled from $2.8 billion in 2016 to $5.6 billion in 2019. The segment's performance last quarter indicates that is on its way to repeating that performance as the 5G smartphone cycle is still in its early phases of growth.
Time to buy
Micron's recent pullback has made the stock extremely attractive. It is trading at just 3.17 times sales despite delivering impressive top-line growth in recent quarters, which is lower than the S&P 500's price-to-sales ratio of 3.21. In addition, Micron's price-to-earnings (P/E) ratio of 19.6 represents a significant discount to the S&P 500's multiple of 31.3.
The chipmaker's forward earnings multiple of just 6.6 points toward a big future earnings jump. So investors have solid reasons to buy this 5G stock as it is expected to clock annual earnings growth of 63% for the next five years, according to analysts' estimates, and is trading at what can be called a dirt-cheap valuation.