Memory specialist Micron Technology's (NASDAQ: MU) stock price hit a 52-week high following the company's stellar fiscal fourth-quarter results. As it stands, Micron shares have shot up 140% in the past twelve months thanks to a rally in the prices of dynamic random access memory (DRAM) and NAND flash.
But skeptics believe that Micron's party isn't going to last forever. Memory prices will eventually hit a ceiling as more supply comes into the market, triggering a downturn that could knock the wind out of Micron's sales.
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So does this mean that investors should start booking profits already, or will it pay to remain patient and keep holding Micron stock in the hope of more gains? Also, is it a good time for a new investor to initiate a position in the stock after its big run in the past year? Let's find out.
The case against Micron
The memory chip industry is a highly cyclical one. It has been subjected to wild swings in pricing in either direction. Back in 2007, DRAM prices dropped below the cost of production as the market went into oversupply mode on the back of lower PC shipments. This was just after a terrific 2006, when DRAM prices had surged 61% as PC OEMs (original equipment manufacturers) had stocked chips to make Windows Vista PCs.
The latest down-cycle in the memory market was as recent as 2016 when DRAM prices fell as much as 20% because of slow PC sales. This forced the top three memory makers -- Samsung, SK Hynix, and Micron -- to control supply, which has proven to be a tailwind for pricing. But higher memory prices are enticing manufacturers to increase production.
Samsung, for instance, has announced a $7 billion investment to boost NAND output over the next three years. The South Korean giant has already approved $2.3 billion of the total quota, so it won't be long before it starts flooding the market with more memory chips as it commands 38% of the global NAND industry by revenue.
On the other hand, SK Hynix has announced that its GDDR6-based DRAM chips will hit the market in early 2018. Therefore, it won't be surprising to see a slowdown in the rate of memory price increments next year. Furthermore, Gartner predicts that memory prices will start crashing from 2019, so Micron's tremendous growth could hit a roadblock pretty soon.
The case for Micron
As evident from the discussion above, weak PC shipments are the common thread behind the memory price crashes in recent years. But things are different this time as the uses of NAND and DRAM have diversified beyond PCs, so the potential increase in supply could be met with an increase in demand.
DRAMeXchange forecasts that DRAM demand will jump 20.6% next year after rising 19.6% in 2017, thanks to higher demand from smartphones and servers. Smartphones, for instance, will witness a 33.4% jump in DRAM content this year to an average of 3.2 GB per device. The trend could continue in the long run as more smartphones with 4GB and 6GB mobile DRAM configurations hit the market.
Server DRAM will be another critical growth driver for the memory industry. In the first and second quarters of 2017, server DRAM prices have shot up 40% and 10%, respectively, as demand has outpaced supply. Prices could go up 3%-8% sequentially in the current quarter as well, driven by higher consumption of DRAM by servers.
What's more, server DRAM demand should remain strong in the long run as high-density modules based on advanced manufacturing nodes hit the market, encouraging server OEMs to upgrade to new technology for faster performance.
Therefore, these two niches could be long-term catalysts for DRAM demand and keep the memory industry away from oversupply. This would be an ideal scenario for investors to keep holding Micron Technology in their portfolios as the company is aggressively targeting the fast-growing specialty DRAM niche with memory products for graphics applications, the Internet of Things, and automotive.
Is it still a good buy?
Micron stock is relatively cheap despite a terrific rise in the past year as its trailing price-to-earnings ratio of 18.2 only slightly higher than the 17.7 industry average, and lower than the S&P 500 average of 21.5.
Furthermore, the stock's forward PE ratio of just 6.2 indicates that analysts are anticipating strong earnings growth in the future. Again, Micron's price-to-sales ratio of 2.2 is slightly lower than the industry's average, providing more proof of the stock's undervaluation. So, it isn't too late for investors who have missed the Micron Technology gravy train to take advantage of the potential growth in memory demand.
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