Shares of Micron Technology (MU 2.11%) have held up well against the poor performance of the Nasdaq Composite year to date. The memory-chip maker delivered outstanding results in the fiscal first quarter, with strong year-over-year revenue growth and solid performance in earnings.
The stock looks cheap at a price-to-earnings (P/E) ratio of 12.6, but Micron has traded at a below-average valuation throughout its history. That's because the market for storage and memory is very competitive. Micron currently holds third place behind Samsung and SK Hynix in both solid-state drives and dynamic random access memory (DRAM) modules. Competition has historically caused swings in selling prices for these products that can make predicting year-to-year results difficult.
However, these risks may not be as important as they were 10 years ago. Let's look at some comments management made recently that suggest investors might be undervaluing Micron's business in 2022.
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2022 demand outlook
Micron is seeing growing demand for its technologies across several markets like data center, automotive, mobile, and personal computing. The long-term demand outlook across these markets is providing much greater visibility for both top-line growth and selling prices for its products.
Cloud and data center operators are expanding their capacity to handle the growing amount of data that is being created around the world. In October, Micron launched the new NVMe 7400 SSD to address this need in the data center. Revenue from the data center business grew more than 70% year over year in the most recent quarter.
"Data center is the largest market for memory and storage, and we expect it to outpace the broader memory and storage market over the next decade," CEO Sanjay Mehrotra said during the earnings call.
Even people working from home are buying more PCs for remote work and gaming, which is good news for Micron's DRAM and SSD products that it makes for consumer applications.
Looking at other areas, like 5G mobile adoption and electric vehicles (EVs), management sees favorable trends emerging in 2022. Both markets are seeing an increasing amount of chip content. For phones, that means more DRAM capacity. Micron reported 25% year-over-year growth in mobile revenue last quarter.
Auto revenue also remained strong, growing 25% year over year. This is being driven by more EVs hitting the road with infotainment and driver assistance applications that require more DRAM and non-volatile flash storage (NAND) chips.
On the first-quarter earnings call, Mehrotra said, "New [EVs] are becoming like a data center on wheels, and we are already seeing examples of 2022 model year electric vehicles supporting Level 3 autonomous capability."
It's for all these reasons that management feels confident that it will report record revenue in fiscal 2022.
How Micron stock can double
The main headwind that could stand in Micron's way would be supply shortages, but management sees that situation improving over the course of the year. A bear market or slowing economy could dent its plans, but at least for now, things are looking up.
Analysts currently expect Micron to report a 16.8% increase in revenue, reaching $32.4 billion, before advancing another 21% in fiscal 2023. Adjusted earnings per share (EPS) are expected to reach $9.07 this year and $12.12 next year.
The markets it is selling into are not going to slow down. 5G adoption is just cranking up, and companies continue to plow billions of dollars into expanding data center capacity. Micron has increased its revenue 252% over the last 10 years, and it's a good bet it will continue to grow for the foreseeable future.
MU revenue (TTM). Data by YCharts. TTM = trailing 12 months.
Micron shares currently trade at a P/E ratio of just 9 times this year's earnings projections. To double by 2023, the company would need to reach $12 in EPS, consistent with early analyst estimates, and trade at a P/E of 13 -- a multiple that would still be relatively inexpensive compared to the average P/E of 24 for the S&P 500 index.
Micron trades like a value stock, but demand for memory and storage technology should grow for several years. If investors start to value Micron more like a growth stock, it is very possible it could double within a few years.
