What happened
Shares of Micron Technology (MU +5.08%) rose 12.1% this week through the end of trading Thursday, according to data provided by S&P Global Market Intelligence, a very good showing for the memory chip maker in a volatile tech market.
The reasons for Micron's rise didn't have to do with any company-specific announcements, as there really weren't any this week. However, a strong earnings season for many other tech companies fueled optimism over the growth of the economy and digital applications. Furthermore, a problem at a competitor's NAND flash plant helped Micron defy the downdraft in the markets on Thursday, when the tech sector was rocked by a hotter-than-expected inflation report.
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So what
Over the past few months, the technology sector has been rocked by fears over inflation and higher interest rates. Micron had actually been outperforming the sector since November, as Micron is a value stock with a low P/E ratio. So, the thinking is that it would be less affected by a rise in rates than growth stocks, whose earnings are far out in the future. Furthermore, since Micron sells commodity-like memory chips whose prices move based on supply and demand, it could actually benefit from inflation, specifically in the memory market.
However, Micron sold off in January, as the crescendo of selling in the markets began to touch all stocks. Some investors may have also begun to fear that the Federal Reserve may over-tighten the economy amid high inflation, and thus push the economy into recession. So even low-priced cyclical stocks like Micron began to sell off based on that new uncertainty, and Micron came into the week well off its 52-week highs.
Yet while Micron doesn't report earnings for another couple of months, many technology stocks have been reporting recently, and earnings have generally been good, with a few exceptions. Notably, most semiconductor companies continue to report beats on revenue and earnings in spite of supply constraints, and many enterprise software and cloud computing companies are reporting strong results, too. These non-hardware companies still depend on semiconductors, memory, and storage to run, so booming results for digitization-focused companies is likely fueling optimism for Micron.
Yet even when inflation fears took hold of the markets on Thursday, Micron got a bit of luck, when a main competitor reported contamination at two if its production sites for NAND flash production. With those NAND bits going offline for an indefinite amount of time, NAND flash prices should rise in the near term. Micron is a leader in 3D NAND and gets about a quarter of its revenue from NAND sales, so it stands to benefit in the near term.
Now what
Despite strong recent results, Micron still looks like a value these days, at just 10 times this year's earnings estimates and around eight times next year's earnings estimates.
Micron's historical volatility has made it trade at a low valuation, but this time may be different. Last summer, management instituted a small dividend for the first time in the modern era, a show of confidence that Micron should remain profitable through all phases of the cycle. Furthermore, Micron is now a technology leader in the industry, as the first memory producer to mass-produce 1-alpha DRAM chips and 176-layer NAND.
So even though shares have had a good week and trade near all-time highs, increased digitization of the economy should lead to strong results for Micron. I don't see that slowing down anytime soon, so the stock still looks attractive, even at these elevated levels.
