As demand for memory and storage products has surged and supply has been limited, Micron Technology (MU 4.04%) has been benefiting from the ongoing shortage in a big way. Its results have looked fantastic, as it has been able to raise prices and generate impressive margins amid continuously strong demand.
The stock has soared 800% over the past 12 months and has become one of the most valuable companies in the world, with a market cap of around $1.3 trillion, heading into trading this week. Is it only a matter of time before it reaches a $2 trillion market cap?
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Micron's valuation remains low, based on analyst forecasts for earnings
A big reason investors remain optimistic that Micron's stock can go higher is due to the incredible results it has been generating. Although the stock's gains are massive, it's not trading at an obscene valuation with its earnings multiple in the triple digits. Instead, shockingly enough, its forward price-to-earnings (P/E) multiple is in single digits. Based on analyst estimates of how its earnings will look in the year ahead, Micron's forward P/E is only seven.
Given the ongoing shortage of memory products and the continued rise in demand and prices for its products, analysts are bullish on Micron's growth outlook. And when factoring that in, the stock's valuation looks cheap. By comparison, the average stock in the S&P 500 trades at a forward P/E multiple of 21, and thus, you might easily conclude that Micron is a bargain buy.
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Is $2 trillion in market cap attainable for Micron Technology?
For Micron to reach a $2 trillion valuation, it would need to rise by about 56% from its current level. That would mean its price rises to around $1,770. Even with such an increase, that might push its forward P/E below 12, which still doesn't look all that high.
It's a feasible possibility given the hype around memory and storage stocks these days and the ongoing investments in tech driven by excitement around artificial intelligence. Investors may, however, also be hesitant to value the tech stock that high due to the industry's cyclical nature in previous years and the potential for a significant sell-off once supply catches up to demand.
Micron's business is red hot, but a lot hinges on expectations of future demand and supply for memory and storage products. Given the uncertainty and risk of a steep correction, I'd stay on the sidelines. Although it has room to rise higher, it may have plenty more room to fall significantly as well.
