This “Pick-and-Shovel” Stock Has 100%+ Upside
Big Data Could Send Shares Soaring
An impressive stock that I want to discuss today belongs to the semiconductor space, which has emerged as a great “pick-and-shovel” play.
These stocks distribute to entire industries and indirectly benefit from booming technology trends. Instead of betting on a single device or project, these companies can make fortunes regardless of which specific company comes out the winner. It’s the safer, more lucrative way of investing in an industry.
The stock in focus is Micron Technology, Inc. (NASDAQ:MU), which is a dominant player in the semiconductor/memory space. Micron builds memory chips like dynamic random-access memory (DRAM), which is used in personal computers and servers, and NAND, which is used in portable devices like smartphones.
Moreover, Micron builds innovative memory technologies that are used in leading-edge consumer, automotive, and networking products. MU stock stands to gain from the changing technology landscape, where the demand for the company’s products will keep on increasing.
It is one of my top investment ideas for the following reasons.
Micron Technology is levered to the Big Data theme, which is gaining strength day by day. With the success of voice assistants like “Alexa” by Amazon.com, Inc. (NASDAQ:AMZN), the rise of connected devices, and the push toward self-driving cars, the need for more storage and memory chips will keep MU stock going higher.
The developing trends point toward higher demand for memory chips, which are a must-have for self-driving cars, data centers, and other systems that need to store huge amounts of data.
Gartner Inc (NYSE:IT) recently published its forecast for global semiconductor revenue at $386.0 billion, an increase of 12.3% from last year. It further said that favorable market conditions, which gained momentum in the second half of 2016, have gained pace and improved the outlook for the semiconductor market in 2017 and 2018.
But the report cautions that the memory market is unpredictable, and that additional capacity in both DRAM and NAND flash could result in a correction in 2019. (Source: “Gartner Says Worldwide Semiconductor Revenue Forecast to Increase 12.3% in 2017,” Gartner Inc, April 13, 2017.)
But Micron is preparing itself for such challenges, especially in the fast-growing mobile space. The company has plans to introduce more than 20 multi-chip package designs during the coming year to address the highest-growth mobile applications. This increases the memory and storage density of smartphones, which device makers like Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOG) need to buy if they want to stay competitive.
In the current digital age, where data creation and consumption will continue to grow many times over, the need for better and faster storage solutions will keep on rising. Micron is well positioned to benefit from this trend, and the following chart is proof of that.
Chart courtesy of StockCharts.com
Micron stock has already clocked a more-than-200% return over the last one year alone and over 350% over the last five years. This is despite the fact that there have been phases when the prices of memory chips had fallen, thus impacting the company’s results and leading to volatility in MU stock.
However, the situation is much better now, with higher demand for DRAM and NAND expected to continue. Not only this, but the prices of these memory chips have been going up, thereby providing the much-needed lift to the company’s profits. With both demand and price trends in Micron’s favor, MU stock has the potential to double in a few years’ time.
On the earnings front, Micron has been delivering better-than-expected results. The company reported its earnings for the second quarter in March and posted adjusted earnings of $0.90, which was above the consensus estimate. Micron also reported revenue of $4.65 billion, which was a 58% year-over-year increase and 17% gain sequentially. This was primarily on account of a 21% increase in the average selling price of DRAM. (Source: “Micron Technology, Inc., Reports Results for the Second Quarter of Fiscal 2017,” Micron Technology, Inc., March 23, 2017.)
The Bottom Line on MU Stock
In a nutshell, Micron stock is a classic pick-and-shovel stock that provides innovative memory solutions for a broad range of applications, and its diversified portfolio of products make it to a number of industries. The company’s earnings have been quite impressive over the last few quarters due to high DRAM prices. But, more than that, the company has made efforts to make itself a more efficient organization and be better prepared to meet future challenges.
The rise in Big Data and machine learning trends will make Micron an important player in the industry because these require large amounts of memory in computers, servers, consumer electronics, and in the cars of future. If you believe that machines will play an important role in our lives, this is one pick-and-shovel stock you would not want to miss. Yes, there would likely be tough times, but they could be leading you to triple-digit returns.
