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1 Semiconductor Stock With 114% Upside, According to Wall Street

By Anthony Di Pizio – Nov 19, 2021 at 7:55AM

Key Points

  • Micron's earnings per share is rising at a compound annual rate of 92% over the past two years.
  • The company operates at the forefront of exciting technological areas like 5G, automotive, and even artificial intelligence.

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It's hard to find value in the red-hot semiconductor sector, but Micron presents exactly that.

The semiconductor industry is responsible for producing the advanced computer chips found in our digital devices. It also plays a crucial role in the business world by powering data centers. 

When the pandemic struck, manufacturing was temporarily shut down across Asia to curb the spread of the virus. Now semiconductor producers like Micron Technology (MU -3.03%) are racing to fill supply backlogs amid the added challenge of surging demand. 

One Wall Street analytics firm thinks Micron's share price could soar to $165 -- or 114% higher from where it trades today. Yet even if it does, it would still be cheap, at least compared to its peers in the broader sector.

A semiconductor manufacturing worker holding and closely inspecting a computer chip.

Image source: Getty Images.

Micron's important role

The U.S. economy has been in the process of a digital transformation for decades. As more businesses adopt digital processes, they create enormous amounts of data as a natural consequence and find themselves needing infrastructure to store and manage it.

Some new-age technology companies even rely on their customers consuming mountains of data as a business model -- think social media, for example. Data centers are therefore a critical piece of the modern corporate world, with some organizations choosing to build their own in-house remote servers owned by third parties, while others choose to outsource them.

But one thing is for certain: Data centers wouldn't be possible without state-of-the-art memory and storage chips like those produced by Micron. It's not only the largest source of demand for Micron, but also the largest source of demand in the industry for such semiconductor products.

On the consumer side, Micron's chips remain in high demand for personal computing and graphics applications, but a huge source of growth in the 2021 fiscal fourth quarter was the mobile segment. Revenue for that segment increased by 25%, and this will likely improve because 5G-enabled devices require significantly more processing power and memory than their predecessors.

The stock is (really) cheap

Analysts expect Micron will generate almost $32 billion in revenue in fiscal year 2022, which would be 15% growth compared to fiscal 2021. But it's the company's rocketing profitability that should be front of mind for investors, with earnings per share (EPS) almost doubling each year on a compounding basis. 

Metric

Fiscal 2020

Fiscal 2021

Fiscal 2022 (Estimate)

CAGR

Earnings per share

$2.37

$5.14

$8.74

92%

DATA SOURCE: MICRON TECHNOLOGIES, YAHOO! FINANCE. CHART BY AUTHOR. CAGR = COMPOUND ANNUAL GROWTH RATE.

Micron's surging gross margin is the key reason for the earnings boost. In fiscal 2021, the blended margin came in at 40%, compared to 31% in the prior year, and the company expects it to be as high as 47% in the current fiscal 2022 first quarter. The reason? Persistent semiconductor shortages allow Micron to charge higher prices and operate at a fuller capacity.

The company's $5.14 in fiscal 2021 earnings places the stock at a current price-to-earnings multiple of 14.9. The iShares Semiconductor ETF, by comparison, trades at a multiple of over 35. That means if Micron reaches the $165 price target set by Wall Street firm Rosenblatt Securities, it would still be trading at a cheaper valuation than its competitors.

The long term looks exciting

One captivating area to watch at Micron is the automotive segment. New vehicles are becoming more intelligent with a growing list of digital features, so they'll demand more advanced computing capabilities over time. Micron continues to see record growth here and has a significant amount of potential with the onset of electric vehicles and self-driving technologies.

On the business side, the company continues to develop artificial intelligence-enabled products for the data center. This could help to activate stored data to provide actionable insights, potentially highlighting new opportunities, as well as predictive capabilities to better protect critical infrastructure.

Micron has the growth, operates in a red-hot sector with a leading product line, and has the backing of prominent Wall Street analysts, with at least 25 of them recommending a buy on the stock. Over the long term, a 114% gain might even be conservative

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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