Micron Technology: Here’s Why MU Stock Could Outperform the Market

MU StockMicron Technology, Inc. (NASDAQ: MU) has been navigating challenging market conditions, but the wind is recently blowing in the company’s favor. What does this mean for MU stock?

Micron stock recovered from its lowest level of $9.31 per share to its current trading price of $17.16 each. MU stock gained 32% over the past three months or 21% year-to-date.

The recent performance of Micron stock shows that the semiconductor company is headed toward growth and profitability. Here are some of the signs pointing out that Micron Technology could outperform the market, thus sending MU stock higher.

Micron Stock’s Three Business Units Achieved Revenue Growth

Micron Technology reported that three out of its four business units achieved revenue growth in the third-quarter fiscal 2016. The improved performances of its businesses were primarily due to higher gigabit sales volumes during the period. (Source: “Form 10-Q,” Micron Technology, July 6, 2016.)

Its “Computer and Networking Business Unit” (CNBU) returned to revenue growth in the third quarter. Its revenue was $1.09 billion, up by four percent from $1.05 billion in the second quarter this year. The ongoing ramping-up of its 20-nanometer products contributed to its positive results.

The company’s CFO, Ernie Maddock, said the launching of Intel Corporation’s (NASDAQ: INTC) new server platform boosted enterprises’ demand for the 20-nanometer, 32 gigabit DDR4 DRAM. The business unit’s cloud segment experienced substantial growth with the transition to DDR4.

Maddock also noted a high demand for its GDDR5 and GDDRx products and anticipated that CNBU would perform well in the fourth quarter due to the growing demand for graphics applications, particularly from the virtual reality (VR) market.

Micron stock’s revenue from its “Mobile Business Unit” (MBU) climbed from $503.0 million to $561.0 million, up 12% quarter-over-quarter. Micron Technology expected a continued demand for its NAND and LP DRAM products in the next quarter.

Its “Embedded Business Units” (EBU) posted revenue of $487.0 million, which is an increase of six percent sequentially. The margin improvement for NAND flash products contributed to the business unit’s positive sales performance. During the quarter, EBU’s automotive segment generated record revenues due to volume increases in DDR3 and a rising revenue mix in eMMC applications infotainment, instrument cluster, and advanced driver assists systems. The company also experienced a healthy demand for NAND and LPDRAM MCPs for action camera and home automation applications.

Micron Technology’s “Storage Business Units” (SBU) suffered a 20% decline in revenue to $719.0 million sequentially. However, the company is confident that its lower-cost 3D NAND products will improve its competitiveness in the market. It is ramping up the volume production of 3D NAND-based SATA and PCIE clients and consumer SSDs.

Micron Stock Strengthens Competitive Position

Micron Technology is implementing initiatives to enhance its ability to compete in the market. The company is progressing in deploying its cutting-edge technology by manufacturing DRAM and NAND. It is also on track with its bit-growth and cost-reduction targets. The company believes that the combination of new products and more efficient manufacturing of advanced nodes will enhance its competitiveness in the remainder of this year and the future.

Some of its latest highly competitive products include the SLC NAND flash for Internet of Things (IoT) and automotive applications, and the mobile 3D NAND for next-generation smartphones.

The company’s second-generation (SPI) NAND and fifth-generation SLC NAND offer the best-in-class reliability, read and program performance, ease of design, and advanced security features.

The mobile 3D NAND provides users with incomparable experience including seamless high-definition video streaming, higher-bandwidth gameplay, faster bootup times, camera performance, and file loading.

With its new products, Micron Technology is making sure that it can get a good slice of the high- and mid-end smartphone segments—which account for approximately 50% of worldwide smartphone volume—and the IoT endpoint hardware and services market, which is projected to reach $3.5 trillion by 2020.

DRAM and NAND Flash Prices are Going Up

Micron Technology’s financial performance was severely impacted by the decline of the prices of DRAM and NAND flash products. Note that DRAM accounts for 60% and NAND accounts for 31% of MU stock’s total revenue. Its fundamentals are heavily dependent on DRAM and NAND pricing.

As mentioned earlier, the recent market trends are now in the company’s favor. The spot prices for DRAM and NAND climbed 11% and 22% in June, respectively, due to the mounting demand from Chinese and Taiwanese smartphone manufacturers offering products with bigger memory capacity. The supply shortage is another reason for the price increase. (Source: “Flash memory prices rebound as makers introduce larger-capacity chips,” Nikkei Asian Review, July 21, 2016.)

The prices of DRAM and NAND flash products are expected to keep rising in the fourth quarter due to tight supply, the recovery of the notebook market, and the robust demand for servers and smartphones. The DRAM contract prices are expected to surge more than 10% sequentially. That bodes well for Micron stock.

The price increase of NAND in 4Q depends on the volume of inventories that module makers are willing to carry. NAND manufacturers are struggling to meet their schedules for the transition to the 3D NAND technology while the demand for enterprise-grade SSDs and the penetration of notebook SSDs are growing fast, according to DRAMexChange. (Source: “DRAM Contract Prices to Rise Over 10% Sequentially in Fourth Quarter as Memory Demand Stays Hot,” TrendForce, September 6, 2016.)

The strength of the sales of Apple Inc.’s (NASDAQ: AAPL) “iPhone 7,” which was launched on Wednesday, September 7, could also drive the prices of NAND flash products this quarter through next year.

The Bottom Line on Micron Stock

The improvement of DRAM and NAND flash prices in the fourth quarter and the potential stabilization in 2017 is a big help for Micron Technology in its efforts to return to profitability. There is a great possibility for the company to beat its earnings and revenue guidance for the fourth quarter, which could send MU stock soaring.

A majority of the Wall Street analysts covering MU stock are bullish—10 of them recommend an “outperform” rating and seven suggested a “buy” rating. The highest 12-month price target for Micron stock is $27.00 per share, which represents a 58.7% upside. The median price target is $18.00 per share, which represents an increase of 5.8%.