Whether it’s a smartphone, an electric vehicle, or even a smart refrigerator, advanced computer chips (commercially known as semiconductors) are playing an important role in powering electronics. In fact, the rapid technological progress in some of those products has driven an unprecedented demand surge for chips, and suppliers are struggling to keep up.
As a result, investors have enjoyed market-crushing upside in semiconductor stocks. Over the last five years, the iShares Semiconductor ETF has returned 204%, almost doubling the gain of the tech-centric Nasdaq-100 market index, which has jumped 119% in the same period.
Micron Technology (NASDAQ: MU) is a global leader in a very specific segment of the chip space, and it’s on the cusp of a growth surge. Its stock is very attractively priced, and that might be the sign investors need to get involved right now.
Positioned for the future
Micron is a specialist in producing memory (DRAM) and storage (NAND) chips, which are used in consumer technologies, industrial applications, and data centers. The latter has become one of the most important pieces of infrastructure in the modern economy as more companies move their operations online and need a place to store and process the information generated by their day-to-day operations.
Micron’s solid-state drive (SSD) data storage technology is designed to make the data center more reliable, faster, and therefore more cost efficient. The company’s SATA SSD series is the industry’s best-selling storage hardware for the data center, and Micron is constantly innovating to improve its edge.
But Micron’s greatest potential growth drivers might come from technologies that are only just emerging. For example, the company describes electric vehicles as data centers on wheels, and it’s eyeing over 100 new models set to hit the market in 2022 alone. Additionally, the continued advancement of self-driving technology means those cars are hungrier than ever for powerful memory chips, in some cases requiring up to 140 gigabytes of DRAM.
Separately, the global rollout of the 5G network continues, and 5G-enabled mobile devices require about double the storage capacity and 50% more memory than their 4G predecessors. Micron thinks 5G smartphone sales will top 700 million during 2022, which would be a 40% jump compared to 2021. Therefore, not only is Micron seeing strong demand volume, but it’s providing more powerful, more complex units at the same time.
Strong growth ahead
The semiconductor sector has historically been very cyclical. Customers upgrade when new chips are introduced, followed by a lull in demand. But given the breadth of technologies now requiring advanced processing power, that cyclical nature might be slowly fading.
Micron’s revenue has typically been lumpy year to year, but it’s on a consistent upswing now with fiscal year 2022 (ending Aug. 31) shaping up to be one of its best ever. And analysts’ estimates suggest fiscal 2023 could be even better, particularly on the profitability front.
Strong demand for Micron’s chips has given the company more pricing power, boosting its gross profit margin to 47.2% in the recent fiscal second quarter, from 46.4% in the previous quarter, and 26.4% a year ago. That’s flowing through to the bottom line to deliver strong earnings-per-share results.
Micron stock is a great value
Micron has generated $7.95 in earnings per share over the last 12 months, which gives its stock a price-to-earnings multiple of just 8.5. That’s 67% cheaper than the Nasdaq-100 index, which trades at a multiple of 26.4, implying Micron stock could triple if it manages to close the gap.
The discount looks even greater on a forward basis. Micron’s forward multiple, based on fiscal 2023 earnings estimates, is just 5.4, so Micron stock would have to quadruple just to trade in line with the Nasdaq 100’s forward multiple of 22.7.
The company’s greatest challenge will be proving to investors that the cyclical nature of its past financial results is over, and the recent strength is here to stay. It certainly has no shortage of future growth drivers to lean on. If it can successfully execute, its stock could soar from here.