Semiconductor stocks have rallied this earnings season thanks to a spate of solid reports from several chipmakers, as well as the excitement around Meta Platforms' vision of building a metaverse, which is expected to create even more demand for chips. As a result, the PHLX Semiconductor Sector index has shot up remarkably in the past month, while shares of Micron Technology (MU 3.71%) have also got a new lease of life after being beaten down for most of the year.
Gloomy forecasts about the health of the memory industry have weighed on Micron stock in 2021, but the recent rally indicates that the chipmaker may be gaining investor confidence once again. Let's look at the reasons why the latest surge in Micron Technology stock could be here to stay.
^SOX data by YCharts
The memory industry is set for another year of growth
Micron Technology delivered terrific sales and earnings growth in fiscal 2021, which concluded on Sept. 2, 2021. The chipmaker's revenue increased 29% during the fiscal year to $27.7 billion, while adjusted net income jumped to $6.06 per share from $2.83 per share in the prior year.
A robust memory pricing environment was the reason behind the impressive growth at Micron last fiscal year, which led to a nice bump in the company's margins and improved its earnings power.
MU Revenue (TTM) data by YCharts
Micron is all set to start the first quarter of fiscal 2022 with a bang. The company expects adjusted earnings of $2.10 per share this quarter on revenue of $7.65 billion, up from earnings of just $0.78 per share and revenue of $5.77 billion in the prior-year period. Micron's guidance indicates that its revenue could increase 32% year over year in Q1. This should crush any doubts about an oversupply in the memory industry playing havoc with prices and throwing Micron's outstanding pace of growth off gear.
More importantly, Micron could sustain its high growth rate for the rest of the fiscal year on the back of strong memory demand and tight supplies. Memory industry leader Samsung pointed out in late October that the chip shortage is likely to persist in 2022 and keep semiconductor prices elevated.
Image source: Getty Images
At the same time, demand for memory chips is expected to remain high on account of higher sales of video gaming consoles and data center servers. This combination of tight supplies and robust demand should bode well for memory prices and Micron Technology. Memory market research firm TrendForce estimates that the combined revenue of DRAM (dynamic random access memory) and NAND flash memory could hit nearly $166 billion in 2022, up from an estimated $160 billion this year.
The interesting thing to note in TrendForce's forecast is that the firm expects memory prices to decline in 2022. But TrendForce believes that stronger sales volumes will make up for the lower prices and send the industry's overall revenue higher. More specifically, DRAM bit supply is expected to increase 18.6% next year, while demand is expected to increase 17.1%. However, it wouldn't be surprising to see demand growing at a faster pace than supply thanks to the arrival of new applications such as the metaverse.
Samsung points out that low-power double data rate 5X (LPDDR5X) DRAM could play an important role in the development of the metaverse, as it is capable of rapid large-scale data processing. As such, the possibility of a memory price bust in 2022 may not hold water given that there are several broad-ranging catalysts that could help demand grow at a faster pace than supply.
Micron Technology stock is still a bargain
Micron stock remains an attractive buy despite its recent rally, as it trades at just 15 times trailing earnings and 8.4 times forward earnings. These multiples make Micron a growth stock that investors may want to buy right away given that the S&P 500 has a price-to-earnings ratio of 28.7.
Throw in the fact that Micron is expected to clock an annual earnings growth rate of more than 20% for the next five years, and investors looking to buy a fast-growing company for the long run have another reason to look at this memory specialist, which seems to have regained its mojo over the past month.
