Source: Micron Technology.
About two months ago, my shares of Micron Technology (MU +9.01%) had nearly tripled in less than 3 years. So I dove into Micron again, just in case it was time to cash in my chips for a fantastic return on my investment.
The takeaway in April was simple. At the end of the day, I was still very comfortable holding my Micron shares, for this value-driven reason: It's still a high-octane growth stock, but priced like a sleepy value play.
But that was then, and this is now. In just two months, Micron shares have surged another 42% higher. My total return is no longer "nearly a triple," but more than a quadruple in 35 months.
Micron's price to earnings ratio has climbed from an eye-poppingly cheap 9.4 times trailing earnings to a far more reasonable 13.3. The story is very similar if we switch to free cash flow valuations, where Micron has moved from 9.1 to 13.6 times trailing free cash flows since early April.
It's hard to look at Micron valuations from a historical perspective. The memory chip industry has been plagued by massive price wars over the past decade, leaving Micron with minuscule or negative cash flows and earnings from time to time. About seven years ago, the company often reported negative gross margins, even. Peering into that rearview mirror, you'll see a broken road with few clear trends -- other than a return to dependable profits since the Elpida acquisition closed in 2013.
In April, I said I was looking for Micron prices near 20 times trailing earnings before selling out. That's the going rate for your average semiconductor stock these days. But the chip sector is large and complex, so this is not a firm rule by any means.
Some high-quality chip designers trade well below the 20x trailing P/E mark. Qualcomm (QCOM +1.17%) sits right at 19.9, but Intel (INTC 2.21%) has fallen all the way to 16.1. Qualcomm supports its higher valuation ratio with 27% trailing net margins, which is a 50% improvement over Intel's 18% profit margins.
Here's where I was prepared to argue that Micron deserved a lower P/E ratio than Qualcomm and Intel, simply because it trades in commodity products with lower bottom-line margins. But the Elpida deal gave Micron significant control over the global supply/demand balance in memory chips, particularly in mobile DRAM products. The pricing power that comes with this market control has catapulted Micron's net margins past Intel's -- with Qualcomm's firmly in its sights.
MU Profit Margin (TTM) data by YCharts
I'm not alone in noticing these trends. Micron has seen no less than 5 analyst upgrades or price targets increases in the last week alone. Major Wall Street firms point to a budding DRAM shortage keeping Micron's unit prices high, and many analysts expect price-to-earnings ratios to keep expanding. "Multiple momentum" is a keyword you'll see often in recent Micron analyses.
These positive Street reports have helped Micron crush the market, and analyst reports often become self-fulfilling prophecies in the short term. Now it's up to Micron to prove these optimistic analysts right.
But given the evidence at hand, including the bullish PC market view we saw when Intel reported earnings last month, the analysts might be onto something this time.
I'll stick to my 20x P/E target for now. The company is set to report third-quarter results after Monday's closing bell, giving us Micron investors another a chance to review the stock and its underlying business.
In the meantime, you won't find me complaining about that sweet three-bagger Micron return.
