Micron Technology (MU -0.33%) was up strongly on Tuesday, following last night's strong earnings report and guidance. But with the stock up nearly 10% today as of this writing at 1:15 EDT and heading back toward the all-time highs hit earlier this year, is the memory producer still a buy?
What was especially encouraging about last night's report wasn't just the numbers themselves, but rather management's comments about the company's improving competitive operation and long-term growth opportunities.
Perhaps the most important phrase of the earnings release and management commentary last night was this tidbit from CEO Sanjay Mehrotra:
With the successful ramp of 1α DRAM and 176-layer NAND products across major end markets, we are several quarters ahead of the industry in market deployment of these leading-edge process technologies. The combination of 1α and 1z DRAM nodes represents the majority of our DRAM bit production.
This statement is a big deal because when Mehrotra took over as Micron's CEO in May 2017, the company's memory technologies lagged behind its two main competitors, Samsung and SK Hynix.
DRAM and NAND flash chip prices are like technology commodities, and their prices fluctuate with supply and demand. So while Micron was one of only three major DRAM producers in the world, its profitability traditionally lagged behind these two competitors, even if they were all selling commodity-like memory bits for similar prices.
However, it appears that Mehrotra's operational discipline has enabled Micron to leapfrog its two main competitors in DRAM, and it's now also a leader in the larger NAND flash sector as well, which has about six major competitors.
A multiple rerating?
The improving cost structure and reputation with customers has consequences for Micron's long-term earnings outlook, as well as the multiple investors may be willing to pay for this cyclical stock. Micron has typically traded at very low multiple of earnings and book value – between one and three times its net assets:
MU Price to Book Value data by YCharts
Despite the recent rise in the stock and its price-to-book ratio today, you'll see that ratio is still below levels from the last peak. That seems to indicate the stock still has room to run, if investors begin viewing Micron differently than they did in the past.
Long-term growth drivers remain intact
Meanwhile, the demand outlook for memory remains as strong as ever, as already-strong long-term trends were accelerated by the pandemic.
Memory demand in cloud computing is exploding, as the use of artificial intelligence and machine learning requires massive amounts of memory per server. Memory and storage as a percentage of the bill of materials for servers is only rising, and data center revenue was up 70% for Micron last quarter.
The auto sector is also becoming extremely semiconductor-heavy; Mehrotra pointed out that vehicles with self-driving features of Level 3 and above are looking more and more like "servers on wheels." Meanwhile, there are 90 million vehicles sold every year, versus just 15 million servers. That means auto revenues could grow from a small percentage of revenues today to a much more significant proportion in the future, as more autonomy and electrification kicks in this decade.
Aside from these two very high-unit growth opportunities, 5G phones will require more than 50% more DRAM and double the NAND content of 4G phones, according to Mehrotra. Meanwhile, the hybrid work environments spurred by COVID-19 should lead to structurally higher PC sales relative to pre-COVID years. And more factory automation, also spurred on by COVID, led to 80% growth in IoT memory revenues last quarter.
The long and short of it
Micron has never really been regarded as a growth stock, since its financial results can change so much from year-to-year. Yet, over the long-term, it should make higher highs and higher lows with each passing cycle. Those cycles should also moderate over time. Management even instituted a dividend this summer to advertise its outlook for steadier business results going forward.
With all these growth drivers and a new competitive edge, Micron could very well become a steadier growth stock this decade, and it only trades around 10 times this year's earnings estimates. So even after this impressive surge, I'm holding on to my Micron shares for the long run. The stock is also a long-term buy for those without a position.