Micron Technology's (MU 2.05%) consistently solid results have failed to appease Wall Street and investors alike, the stock fell more than 20% over the past six months in anticipation of a crash in memory prices.
However, the memory price bust hasn't arrived yet, which is clear from Micron's outstanding fiscal fourth-quarter numbers that were released last month. What's more, the anticipated decline in memory prices that has led investors to sell Micron stock won't be arriving any time soon, as the company is on track to deliver terrific growth in revenue and earnings once again this quarter.
And now, Micron has decided to spend $150 billion over the next decade to meet the booming memory demand that has been the key to its terrific performance in recent quarters. This is a huge vote of confidence in the memory market's prospects from Micron, which also indicates that the company's impressive growth is here to stay for the long run.
Micron's investment plan points toward better times for the memory industry
Micron "intends to invest more than $150 billion globally over the next decade in leading-edge memory manufacturing and research and development (R&D), including potential U.S. fab expansion. Micron's investment will address the increasing demand for memory that is essential to all computing."
The press release adds that memory and storage account for 30% of the semiconductor market right now. In addition, Micron points out that memory chips are set to enjoy secular growth on account of the growing adoption of technologies such as fifth-generation (5G) wireless connectivity, artificial intelligence (AI), and automotive connectivity. These are some of the markets that will create the need for more storage and memory, and Micron's investment suggests that it doesn't want to miss out on this gravy train.
A report from tech market analyst firm ResearchAndMarkets points out that the demand for next-generation memory chips could increase at a compound annual growth rate (CAGR) of nearly 30% through 2026. At the end of that span, memory solutions for advanced applications such as automotive systems, the Internet of Things, and high-end laptops, should hit $12.8 billion in annual revenue. Meanwhile, the overall market for memory chips is expected to expand from $85.7 billion last year to more than $108 billion by 2028, according to another third-party research firm, Verified Markets Research.
Micron held 23.5% of the dynamic random-access memory (DRAM) market last year, behind Samsung and SK Hynix, which controlled 41.7% and 29.4% of this space, respectively. Meanwhile, Micron's share of the NAND flash storage market stood at 11.2% at the end of 2020. So, the company is doing the right thing by ramping up its investments in manufacturing capacity and R&D as it could pave the way for stronger market share and potentially higher revenue and earnings.
Additionally, the secular growth in memory demand and the efforts by chipmakers to ramp up their production lines is an indication that the memory market may have left the vicious cycle of booms and busts behind. Micron has historically been crushed by memory bust cycles when oversupply caused DRAM and NAND prices to drop. But now, there is a shortage of memory chips on account of the soaring demand from several verticals.
Micron CEO Sanjay Mehrotra had warned earlier this year that the memory chip shortage could last through 2022. So, the company's move to shore up output and satisfy the end-market demand makes sense.
Why the stock is a buy
Micron stock's slide this year seems unjustified given the pace at which the company's top and bottom lines have increased.
More importantly, the chipmaker is expected to keep growing at a fast clip in the long run, with analysts expecting annual earnings growth of over 22% for the next five years. This isn't surprising given the prospects of the memory market discussed above, as well as the fact that Micron seems to be going after a larger chunk of the massive end-market opportunity at hand with its decade-long investment plan.
All of this makes buying this tech stock a no-brainer right now, given that it is trading at just 13 times trailing earnings and 7 times forward earnings. These multiples are dirt cheap when compared to the S&P 500's trailing price-to-earnings (P/E) ratio of 30 and forward P/E ratio of 22, as well as the fact that Micron is on track to clock 33% year-over-year revenue growth this quarter. Its earnings are expected to increase to $2.10 per share from $0.78 per share a year ago.
In all, Micron offers impressive growth at a cheap valuation, making it a top growth stock to buy for the long run. The world's appetite for memory chips will continue to increase at a rapid pace, and the company is taking steps to ensure that it is one of the top players in this space.