When it comes to tech stocks, I generally prefer software and services firms to chipmakers. The reason is that the software and services business tends to be recurring, therefore providing a greater degree of certainty compared to the semiconductor industry, which can be very cyclical in nature.
Still, in October 2020, I wrote a piece on Micron Technology, Inc. (NASDAQ:MU), explaining why this particular semiconductor company could be a “serious growth opportunity.”
When that article was published on October 12, Micron stock was trading at $50.68 per share. Today it’s at $84.33, marking a return of more than 66%.
Micron Technology, Inc. (NASDAQ:MU) Stock Chart
Chart courtesy of StockCharts.com
Usually, when a stock enjoys a massive rally in a short period, it tends to “take a break” after a while. Indeed, that’s what we’ve seen with Micron stock in recent trading sessions. After reaching a new high on March 1, MU stock pulled back instead of continuing its upward momentum.
The stock market seems to be cooling down a bit. If there’s more profit-taking in the stocks that have gone up a lot, we could see more selling pressure in the tech sector.
That said, from a fundamental perspective, Micron Technology, Inc. should have no problem continuing to churn out impressive financial growth in the years to come.
The reason lies in 5G.
Micron Stock Set to Benefit From 5G Rollout
You see, even though the COVID-19 pandemic has delayed the deployment of 5G networks and the rollout of certain 5G smartphones, the industry has nonetheless been taking off. It’s estimated that 250 million 5G handsets were shipped in 2020, and that number is expected to double in 2021.
How does that benefit Micron Technology, Inc.?
Well, Micron’s dynamic random access memory (DRAM) chips are widely used in smartphones, so higher 5G handset production figures would certainly boost its business.
And there’s more: because each 5G smartphone requires more DRAM than its 4G counterpart, the 5G era presents a higher content opportunity for Micron.
The company’s president and chief executive officer, Sanjay Mehrotra, explained this growth theme pretty well:
…I think it’s important to understand that not only is it about the 5G number of units increasing, more than doubling calendar year ’20 or calendar year ’21 going from 250 million 5G smartphones in ’20 to 500 million plus in 2021. But the average content of DRAM is increasing in these 5G phones as well. So that’s the multiplicative impact with respect to the DRAM demand growth in the smartphone market. And if you look at the calendar of DRAM content over the course of [the] next three years or so, that CAGR of average content growth in the smartphone market is in the double digits range.
(Source: “Micron Technology, Inc. (MU) CEO Sanjay Mehrotra on Q1 2021 Results – Earnings Call Transcript,” Seeking Alpha, January 7, 2021.)
Mind you, while 5G adoption is going to be a multi-year process, Micron’s business is already on the rise.
In the first quarter of the company’s fiscal year 2021, which ended December 3, 2020, it generated $5.8 billion of revenue, representing a 12.2% increase year-over-year. (Source: “Micron Technology, Inc. Reports Results for the First Quarter of Fiscal 2021,” Micron Technology, Inc., January 7, 2021.)
Micron’s adjusted earnings came in at $0.78 per share, up a whopping 62.5% from the $0.48 per share earned in the year-ago period.
And the best could be yet to come.
On March 3, the company announced an increase to its guidance. Management now expects Micron to generate $6.20 billion to $6.25 billion of revenue and $0.93 to $0.98 of adjusted earnings per share in the second quarter of the company’s fiscal 2021. (Source: “Micron Updates Second Quarter Fiscal 2021 Guidance,” Micron Technology, Inc., March 3, 2021.)
Previously, the guidance range was $5.6 to $6.0 billion for revenue and $0.68 to $0.82 for adjusted earnings per share.
As mentioned earlier, Micron stock is now more expensive than the last time I profiled it.
However, Micron Technology, Inc. is well positioned for the 5G era, and its business is as solid as ever. In other words, the recent pullback in MU stock could be an opportunity for investors to get on board.