Micron Technology's (MU +5.14%) stock surged nearly 11% on Dec. 21 after the memory chipmaker posted its first-quarter earnings report.
Its revenue rose 33% year-over-year to $7.69 billion, beating estimates by $10 million. Its adjusted net income soared 175% to $2.47 billion, or $2.16 per share, which also topped expectations by a nickel.
Those headline numbers look impressive, but five green flags indicate this cyclical semiconductor stock could still have more room to run.
Image source: Getty Images.
1. Its double-digit revenue growth will continue
Micron's 33% revenue growth in the first quarter represented its fourth consecutive quarter of more than 30% growth. It also marked its seventh straight quarter of double-digit revenue growth.
Micron expects its revenue to rise 17%-23% year-over-year in the second quarter of fiscal 2022. Analysts expect its revenue to increase 15% for the full year, compared to its 29% growth in fiscal 2021.
Micron's growth is decelerating, but it's still an impressive rate for a stock that trades at just three times this year's sales. By comparison, Intel (INTC +4.97%) -- which is expected to post a 6% revenue decline this year -- also trades at about three times that estimate.
2. Its cyclical slowdown hasn't happened yet
Before generating double-digit revenue growth for nearly two years, Micron posted six straight quarters of year-over-year revenue declines throughout fiscal 2019 and 2020. That cyclical slowdown was caused by a global glut of DRAM and NAND chips, which can partly be attributed to the sluggishness of the PC and smartphone markets before the pandemic hit.
Micron benefited from the market's recovery over the past seven quarters, and that growth was amplified by robust demand from the work-from-home, gaming, 5G, and data center markets throughout the pandemic.
However, the bears believe that growth cycle will end in the near future. Gartner and Trendforce both expect prices for DRAM chips, which accounted for 72% of Micron's revenue last year, to decline in 2022 as inventories rise again. The NAND market, which accounted for 25% of Micron's revenue last year, faces similar headwinds.
That outlook seems grim, but Micron's recent slowdown was mainly caused by temporary supply chain challenges instead of a cyclical deceleration. Micron manufactures its own chips, but the ongoing shortage of CPUs, GPUs, and other crucial components for completing PCs and servers also curbs the market's appetite for its DRAM and NAND memory chips. Micron also faces supply constraints for some of its own IC components.
Simply put, the underlying demand for Micron's chips across the PC, gaming, data center, cloud, automotive, and 5G markets remains strong -- but the global chip shortage is preventing it from meeting that demand.
Therefore, Micron's dreaded cyclical slowdown hasn't actually started yet. Instead, Micron expects the supply chain headwinds to gradually wane and boost its bit shipments in the second half of calendar 2022.
3. Micron's margins are still strong
Micron's gross and operating margins dipped sequentially in the first quarter as it grappled with the supply chain challenges and sold a higher mix of lower-margin NAND chips, but both figures jumped from the prior year quarter:
|
Period |
Q1 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|
|
Gross Margin* |
30.9% |
47.9% |
47% |
|
Operating Margin* |
16.9% |
37.1% |
35.4% |
Source: Micron. *Non-GAAP basis.
Micron expects its adjusted gross margin to dip sequentially again to 46% (at the midpoint) in the second quarter, but that would still represent a big leap from 32.9% a year ago. If the global chip shortages and supply chain challenges ease in the coming quarters, its margins will likely stabilize.
4. This cycle could be a "super cycle"
In the past, Micron's growth was primarily driven by the PC, data center, and smartphone markets.
But looking ahead, the expansion of the 5G, AI, data center, driverless vehicle, and mixed reality markets could all cause the market's demand for DRAM and NAND chips to outstrip the available supply. If that happens, the memory chip market could experience a smoother "super cycle" of growth, which could last much longer than its previous "boom and bust" cycles.
Micron is also the only pure play on DRAM and NAND memory chips in the U.S. market, so this super cycle will likely drive more investors toward its stock -- even though it's already risen nearly 200% over the past three years.
5. Its stock is still surprisingly cheap
Micron expects its adjusted earnings per share to nearly double year-over-year in the second quarter. Analysts expect its earnings to grow 44% for the full year, even as it works through the near-term supply chain challenges.
That's a high growth rate for a stock that trades at just nine times forward earnings. Intel, which faces an earnings decline as it expands its plants this year, has a much higher forward price-to-earnings ratio of 14.
Micron is still a long-term winner
Micron faces other near-term headwinds, including SK Hynix's purchase of Intel's NAND business, Kioxia's emergence as another NAND rival, and the uncertain future of the CHIPS Act, which would support U.S. chipmakers with big subsidies. Nonetheless, I believe Micron's strengths still outweigh those vulnerabilities and make it a compelling long-term investment.
