Micron Technology Stock Still Looks Like a Great Buy Headed Into 2022

In spite of a global chip shortage contributing to a fantastic sales environment for chipmakers this past year, Micron Technology (MU 2.92%) stock has tapped the brakes as of late. Shares of the memory manufacturer are up just 9% with just a couple of weeks left until the new year, lagging behind the nearly-22% gain for the S&P 500.

However, the company just reported a fantastic Q1 of fiscal year 2022 (the three months ended Dec. 2, 2021), and remains optimistic that demand will remain strong in the year ahead. Digital memory is one of the more volatile segments of the semiconductor industry, but Micron stock looks like a solid buy again headed into 2022. 

Image source: Getty Images.

A great start to a new year

Micron's financial results for the first quarter of its fiscal new year came in just above the midpoint of management's outlook, which it provided a few months ago. That was good news given it was lapping a period a year ago in which global manufacturing was still largely locked up due to COVID-19.

Data source: Micron Technology. 

More importantly, though, Micron's forecast for Q2 implied a 20% year-over-year increase in revenue and a 99% increase in adjusted earnings per share at the midpoint of guidance. Additionally, CEO Sanjay Mehrotra said on the earnings call that the company is on pace for a new all-time record in annual sales, which would eclipse fiscal 2018 -- corresponding to calendar year 2017 and 2018, right before the U.S.-China trade war started to wreak havoc on the global semiconductor industry.

After the latest quarter, Micron stock now trades for just under 12 times trailing 12-month adjusted earnings per share. Compared to its peers in the high-flying semiconductor industry, Micron appears to be a serious bargain right now.

Improving supply, continual new demand

Why such a "cheap" valuation? Though a fast-growing industry overall, memory chips are highly commoditized. A piece of digital storage is a basic item that can be found in nearly every piece of equipment or consumer good with an electrical current running through it these days. As a basic component used in the manufacturing of higher-value items, memory chip companies are highly sensitive to even small changes in supply and demand. This explains the snaking path of Micron's historical sales and profitability over time. 

Data by YCharts.

While Micron and friends in the chipmaking world are currently enjoying tight supply due to the effects of the pandemic and booming demand from nearly every corner of the global economy, there's fear that the next cyclical downturn for digital memory could be right around the corner. In fact, Mehrotra said on the earnings call that tightness in Micron's global supply chain should "gradually improve throughout 2022." 

On one hand, this is fantastic news. Micron and other chipmakers have had to leave sales on the table this past year because of an inability to produce enough hardware, so better supply will help push sales higher. But better supply could also gradually decrease pricing power on these basic chips, and eventually lay the groundwork for the next downturn in sales and profitability. At least for now, it appears that won't happen in 2022, but perhaps 2023 will be different.

Nevertheless, while digital memory will go through its wild business cycles, it's a secular growth industry as well. From ever-advancing consumer electronics to data centers powering the cloud to connected and battery-powered autos, an order of magnitude more memory will be needed in a decade than is needed today. Micron is a great way to get broad-based exposure to all sorts of technology developments. 

Given the strong tailwinds that will fill Micron's sails throughout the 2020s, shares look downright attractive to me heading into 2022. Sooner or later, this leading memory chipmaker will fall on tough times again -- but the next year looks like business will remain strong as sales and profitability continue to improve.