Shares of Micron Technology (MU +11.70%) have jumped by more than 7x over the past year, driven by phenomenal growth in the company's revenue and earnings.
However, Micron stock has fallen out of favor with investors lately. It has pulled back 29% since hitting a 52-week high on June 25. This sharp drop is unrelated to the company's financial performance, as it continues to benefit from the ongoing memory shortage. Investors, however, have been rotating out of memory stocks lately, which explains the drop in Micron's shares.
As a result, it won't be surprising to see Micron management going for a stock split this year. Let's see why that may be the case.
Image source: Micron Technology.
A stock split could increase demand for Micron stock
A stock split is a cosmetic move that increases or decreases the number of outstanding shares of a company while keeping the market capitalization constant. A forward stock split is the most common type of stock split, increasing the outstanding share count and lowering the price per share.
NASDAQ: MU
Key Data Points
Now, a forward stock split doesn't alter a company's fundamentals or prospects. However, it is believed that a lower share price could increase demand for a company's shares by making them easier for retail investors to own. Also, a lower share price encourages stronger trading volumes and is considered a sign of management's confidence in a company's prospects.
Given that Micron has delivered stellar returns over the past year and each share of the company now trades at just over $900, as of this writing, the time seems ripe for a forward stock split. Let's say Micron executes a 10-for-1 forward stock split, each share of the company will trade at around $90, potentially boosting demand for its shares.
This could help arrest the recent slide in Micron stock. However, if someone has enough disposable cash to buy this company's shares or access to a brokerage that allows buying fractional shares, buying Micron is a no-brainer following its recent pullback.
The stock's drop is a terrific buying opportunity
Micron now trades at just 19 times earnings following its recent slide. Moreover, its forward earnings multiple of just 5.5 is even more attractive. For a company whose earnings increased by a stunning 13x year over year in the previous quarter, buying this stock is a no-brainer at its current multiples.
More importantly, the artificial intelligence (AI)-fueled memory shortage won't end soon. Memory chip demand could outpace supply well beyond 2030, according to industry bellwether SK Hynix. Additionally, Micron is strengthening its long-term revenue pipeline by inking long-term supply agreements with customers.
It recently signed such agreements with companies like Qualcomm and Harman to supply memory chips for automotive applications. Micron notes that it signed 16 long-term customer agreements just last month, which isn't surprising as memory is one of the most important components in data centers, smartphones, personal computers, and automotive applications.
This explains why Micron's terrific earnings growth is poised to continue beyond this year.
Data by YCharts
So, Micron may not trade at a dirt cheap valuation for long. Moreover, a potential stock split could give the stock a psychological boost. That's why investors who can buy Micron stock now should do so right away, as the outstanding growth in its revenue and earnings could send it on a bull run once again.
