Micron Technology (MU -0.60%) has always been volatile, thanks mainly to the nature of its business of supplying commoditized products: computer memory and storage. When demand is high, prices for these products shoot up, but when demand is low (or supply is high), these products can fall below their production cost.
As a result, Micron's profitability has always been cyclical -- a few years of good profits followed by some loss-making years. In short, it has always been a challenging business for management and investors alike.
Still, some smart investors have built up positions in the company in recent years. While we can't always know why exactly they did so, we can make some educated guesses. Here are two good reasons for them to like the company.
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1. Micron is betting big for the next decade
To make the most out of an investment, growth investors often look for companies riding on secular growth trends. In today's terms, this means areas like smart cars, 5G, the metaverse, Internet of Things, and more. That is why major tech companies like Tesla, Alphabet, Microsoft, Nvidia, and Apple -- just to mention a few -- are attracting plenty of interest from investors.
Micron, while perhaps not as well-known, is well-positioned to benefit from these trends. As the only U.S.-based memory manufacturer, the semiconductor company supplies memory (DRAM) and storage (NAND), which are critical components to power these growing trends.
To make the most out of these tailwinds, Micron is investing heavily -- more than $150 billion -- in leading-edge manufacturing and research and development (R&D) in the next decade. This is no small thing. On one level, it shows the commitment and willingness to expand aggressively, which is the opposite of capital-light business model often preferred in today's business environment.
More importantly, these investments will expand the barriers to entry in an industry that has only three major players -- the other two being Samsung and SK Hynix, both based in South Korea. Absent price wars, there is a good chance that Micron's investment will generate good, if not superior, shareholder value over the long term.
2. Management has a record of smart capital allocation
The $150 billion investment plan shows that Micron is willing and committed to growth. That, however, is just half of the story. The management also has a strategy in returning excess capital to shareholders.
Since CEO Sanjay Mehrotra took over the leadership in 2017, Micron has returned $7 billion to shareholders through buybacks, initiated quarterly dividends last year, and retired $5 billion in debt. Despite all of that, the company still ended up with $4.5 billion in cash (net of debt) in the fiscal first quarter of 2022.
Under Mehrotra's leadership, Micron not only has been growing its business -- the four-year average revenue improved by 57% from fiscal 2017 to fiscal 2021 -- it has also been rewarding shareholders. And with a clear road map for the next decade, the semiconductor company is well-positioned to repeat this strategy on a larger scale.
Warren Buffett, the Oracle of Omaha, has repeatedly emphasized that a good management team should have both operational and capital allocation skills. With Micron, investors are getting both. And if management continues to deliver in the next decade the way it did in the last few years, investors will benefit handsomely from holding Micron stock.
