Micron Technology (MU -0.59%) stock has outperformed the broader market handsomely over the past three years, even though shares of the memory specialist have faced bouts of volatility thanks to changing memory market dynamics that have affected its revenue and earnings growth from time to time.
As it turns out, analysts are expecting the chipmaker to face tough times ahead on account of potential weakness in memory demand that could lead to a drop in prices and derail the company's terrific growth. Piper Sandler analyst Harsh Kumar recently downgraded Micron stock to underweight (or sell) from neutral (or hold). He also slashed his price target to $70 from $90.
The analyst cited Micron's exposure to consumer-centric markets such as personal computers (PCs) and smartphones, where demand could take a hit on account of weak spending. Kumar is concerned that weakness in demand could send dynamic random access memory (DRAM) prices crashing, and that won't bode well for Micron, as history tells us. Not surprisingly, investors pressed the panic button following Sandler's report, and Micron's stock plunged.
However, savvy investors may want to use Micron's latest drop to buy more shares. Let's see why.
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Micron Technology stock is dirt cheap right now
Micron Technology stock is already trading at Sandler's price target following its latest drop. What's more, shares of the company have fallen nearly 25% this year amid the tech stock sell-off. So, it can be said that the headwinds that the investment bank mentioned while downgrading Micron are already priced into the stock.
Additionally, Micron's sharp pullback in 2022 has made the stock dirt cheap. It is trading at just 8.8 times trailing earnings and 2.55 times sales. These multiples are lower than the S&P 500's price-to-earnings ratio of 21.7 and sales multiple of 2.6. For a company that has been clocking tremendous growth consistently over the past few quarters, Micron's valuation makes buying the stock a no-brainer right now.
The company had released its fiscal 2022 second-quarter results (for the three months ended March 3, 2022) on March 29, reporting a 25% year-over-year increase in revenue to $7.79 billion. Its adjusted earnings had shot up to $2.14 per share from $0.98 per share in the year-ago period. According to consensus estimates, Micron is expected to sustain its momentum in fiscal 2022 and end the year with a 21% increase in revenue and a 57% increase in earnings per share.
Micron is expected to sustain its momentum in fiscal 2023 as well, with another year of 20%-plus revenue growth and a 31% jump in earnings per share. This potential growth could translate into solid stock market gains and help Micron beat the broader market once again like it has been doing over the past few years, especially considering the lucrative markets it can take advantage of.
Healthy growth in memory demand should be a long-term tailwind
The memory market is sitting on multiple growth drivers, ranging from smartphones to data centers to graphics cards to automotive.
For instance, the adoption of 5G smartphones is creating the need for more memory for both storage and computing purposes. More specifically, Micron points out that the DRAM content in 5G smartphones is 50% higher as compared to 4G devices. NAND flash storage, on the other hand, is doubling in 5G devices as well.
Given that shipments of 5G smartphones are expected to jump from an estimated 549 million units last year to 1.18 billion units in 2025, it is difficult to see why there would be a slowdown in the demand for Micron's offerings. The mobile business produced nearly one-fourth of Micron's total revenue last quarter, and it seems built for solid long-term growth.
Meanwhile, the Compute and Networking business unit, which is Micron's largest source of revenue with 44% of the total, has multiple growth drivers that should help it overcome any near-term slowdown in PC demand. For instance, the company's chips are used in cloud servers and graphics cards, and both markets are built for secular growth.
Graphics card sales, for instance, are expected to grow at an annual pace of nearly 33% through 2027. Now, graphics cards are equipped with DRAM chips that are capable of processing large volumes of data, which means that the fast pace of growth in this market should increase Micron's addressable revenue opportunity.
All these growth drivers explain why the global DRAM market is expected to be worth $258 billion in 2030 as compared to $110 billion in 2020, according to third-party estimates. Micron's solid share of this market and its efforts to strengthen its position over here thanks to its product development moves should help the chipmaker sustain its terrific growth for years to come.
As it turns out, analysts are expecting Micron's earnings to grow at nearly 30% a year for the next five years. The company seems capable of hitting that target, which is why it won't be surprising to see Micron remain a top growth stock in the long run and beat the broader market, as it has done in the past.
