Why Micron Technology Remains a Buy After Its Latest Earnings Report

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The Micron Technology (NASDAQ: MU) juggernaut isn't showing any signs of stopping, as it thumped Wall Street's expectations with a solid fiscal second-quarter earnings report and good forward guidance. The memory specialist's strong showing wouldn't have surprised investors as it has been enjoying favorable pricing conditions in the DRAM (dynamic random access memory) market.

Still, shares of the chipmaker fell after the earnings report as investors were possibly expecting bigger guidance numbers. But a closer look at Micron's results, guidance, and memory market conditions indicate that it is capable of sustaining its impressive rally in the future, and there's no reason for investors to panic.

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Terrific growth once again

Micron's fiscal second-quarter revenue shot up 58% year over year to $7.35 billion, and its net income more than tripled to $3.5 billion. The company enjoyed such massive growth thanks to the strong demand for its DRAM and NAND flash memory chips. More specifically, DRAM shipments increased in the mid-single-digits, while the average selling prices were up in the low double digits as compared to the first quarter.

This boosted Micron's DRAM revenue by 14% on a sequential basis and 76% as compared to the year-ago period. The sequential rise in DRAM pricing and demand suggests that this market is in great shape, which is good news for Micron investors as this segment supplies 71% of the total revenue.

What's more, the favorable pricing conditions boosted DRAM non-GAAP gross margins by a whopping 22% from the prior-year period. Similarly, the NAND flash business, which accounts for a fourth of the top line, also reported substantial growth. Gross profit margins in this segment increased 16% year over year on the back of a 28% increase in the revenue.

However, while demand looks strong there were mixed indications on the pricing front. Though NAND shipments increased in the low double digits sequentially, average selling prices dropped in the mid-teens. Micron has put the blame for this price drop on a shift in the mix of product sales and a higher proportion of "last-time purchase of higher price MLC NAND" in the previous quarter. Investors shouldn't panic just yet as Micron expects the long-term scenario in the NAND industry to play out in its favor.

Why Micron isn't done growing yet

Micron expects $7.4 billion in revenue and $2.83 per share in earnings during the current quarter that ends in May. Both these numbers are comfortably above consensus estimates and the company's last year's revenue and earnings per share of $5.57 billion and $1.62 per share, respectively.

The latest memory price boom seems to be different than what we have seen previously as there are now more avenues for sales of DRAM and NAND products. These memory products used to be primarily used in personal computers, so increased production created an oversupply as PC demand has been tumbling. The situation is different now as DRAM and NAND memory products are being used across a wide range of applications such as servers, smartphones, and solid-state drives (SSDs), among others. For instance, Micron's server revenue was up 30% sequentially last quarter thanks to the increasing adoption of this memory in data centers.

Looking ahead, these segments should lead to improved demand for Micron's memory chips. Global server shipments are estimated to grow at an annual rate of 6.5% over the next five years, according to DigiTimes Research. This should lead to higher demand for DRAM chips as each datacenter required around 10 million gigabytes (GB) to 20 million GB of data on an average, according to DRAMeXchange. Not surprisingly, server DRAM demand is expected to soar close to 30% this year, and the market should sustain this momentum thanks to secular datacenter growth.

Any increase in memory chip supply will be lapped up by the existing demand in the end-markets. This is exactly what Micron management stated on the latest conference call. The company believes that the 45% increase in NAND bit supply this year will go toward fulfilling demand across enterprise and cloud applications. On the other hand, DRAM prices should also continue increasing as supply is expected to grow 20%, while the market's overall revenue could increase 30%.

The negative reaction to Micron's latest quarterly report and guidance is uncalled for, especially considering its cheap valuation. Analysts expect the chipmaker's earnings to grow at a CAGR (compound annual growth rate) of 27% over the next five years. This makes the stock an enticing choice given a low price-to-earnings ratio of just 9. Investors should treat any pullback in Micron shares as a buying opportunity.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.