Micron Technology (MU 0.49%) stock has slipped over 3.5% after its fiscal 2021 fourth-quarter earnings report (released on Sept. 28) failed to excite investors. The memory specialist's weaker-than-expected guidance was enough for investors who fear that a memory price bust may be around the corner to hit the panic button -- an event that's likely to throw Micron's outstanding growth off track.
However, savvy investors should treat the recent decline in Micron shares as a buying opportunity. Let's see why.
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Micron Technology investors should focus on the bigger picture
Micron finished the fourth quarter of fiscal 2021 with adjusted earnings of $2.42 per share on revenue of $8.27 billion. The numbers were a big improvement over last year's earnings of $1.08 per share and revenue of $6.06 billion and exceeded the Wall Street estimate for $2.33 per share in earnings on $8.2 billion in revenue.
Micron enjoyed a robust memory pricing environment during the quarter, which is evident from its non-GAAP gross margin of 47.9% as compared to the prior-year period's figure of 34.9%. Its adjusted operating margin was up 16 percentage points year over year to 37.1% during the quarter.
Micron expects $7.65 billion in revenue this quarter, along with 47% in adjusted gross margin and non-GAAP earnings of $2.10 per share. The chipmaker had delivered $0.78 per share in earnings in the prior-year period on $5.77 billion in revenue, while the non-GAAP gross margin stood at 30.9%. So, Micron's revenue is on track to increase nearly 33% year over year. What's more, margins would increase significantly once again and lead to a sharp jump in earnings, indicating that the strong memory pricing environment is here to stay.
Wall Street, however, was expecting $2.53 per share in earnings on $8.54 billion in revenue. So, Micron's guidance missed expectations by a wide margin and investors were quick to jump ship. But then, it is worth noting that the reason why Micron's guidance was lighter than expectations is temporary in nature. CEO Sanjay Mehrotra explained on the earnings conference call that:
In the near term, our FQ1 bit shipments will decline modestly in both DRAM (dynamic random access memory) and NAND from very strong levels in FQ4. Some PC customers are adjusting their memory and storage purchases due to shortages of non-memory components that are needed to complete PC builds. We expect this adjustment at our PC customers to be largely resolved in the coming months. We are also seeing constraints within our supply chain for certain IC components, which will somewhat limit our bit shipments in the near term.
So, Micron's prospects are limited by a shortage of components at personal computer (PC) manufacturers, and not by weak demand for memory products. That's not surprising as the PC market is expected to remain in good health going forward. Market research firm IDC estimates that the demand for desktop PCs, notebooks, and workstations could grow at an annual pace of 3.2% through 2025. As a result, PC DRAM demand could bounce back once the near-term supply constraints are taken care of.
In fact, Micron expects shipments to start growing in the second half of fiscal 2022. The company is forecasting record revenue for the year along with "solid profitability." So, it may not be long before the stock starts soaring once again as the PC market gets back on track and the other catalysts that Micron is sitting on ensure the continued growth of its top and bottom lines.
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These markets could drive strong memory consumption
The PC market accounts for a small portion of the DRAM market. Memory industry research firm TrendForce had pointed out in December 2020 that PCs accounted for 13% of the total DRAM market, while the server and mobile markets accounted for 75% of the shipments. The good part is that the server and mobile DRAM markets are driving healthy memory demand.
Micron points out that its data center revenue business improved last quarter thanks to "secular drivers in cloud demand and a resurgence of enterprise IT investment linked to improving economic growth." This is a trend that's likely to continue on the back of more data center buildouts and an increase in server workloads. For instance, the number of hyperscale data centers is expected to double by 2025, according to SK Hynix.
A hyperscale data center is much larger than a typical data center. It may contain hundreds of thousands of physical servers and millions of virtual servers, and their electric power requirements run into multiple megawatts. As a result, the increase in deployment of hyperscale data centers triggers dramatically higher demand for DRAM and NAND flash memory. Meanwhile, the usage of DRAM and NAND flash in smartphones is increasing at a rapid pace thanks to the higher memory demands of using 5G wireless networks.
Counterpoint Research estimates that the NAND flash consumption of smartphones could increase three times by 2025 as compared to 2021. Similarly, the average DRAM capacity of smartphones is increasing in the 5G era. Given that annual shipments of 5G smartphones could hit 1 billion units by 2025 as compared to an estimated 269 million units last year, this market seems set to drive strong memory demand in the long run.
Not surprisingly, the DRAM market is expected to clock nearly 29% annual growth for the next two years. The demand for NAND flash is expected to increase at an annual pace of over 11% for the next five years, according to a third-party estimate.
Time to buy the stock
The discussion above indicates that Micron should continue to witness healthy memory demand in the future. This is the reason why the company is upbeat about its prospects in the new fiscal year, while analysts are forecasting 20%-plus annual earnings growth for the next five years.
All of this makes Micron Technology an enticing growth stock to buy right now, as it is trading at just 14 times trailing earnings, which is a big discount to the S&P 500's earnings multiple of 30.
