Strong Demand Revival Could Drive Micron Technology Stock To Fresh Highs

Despite a 2.7x rise from its low in March 2020, at the current price of $92 per share, we believe Micron Technology stock (NASDAQ: MU) has further upside potential. Micron stock rose from $34 in March 2020 to $92 currently, while the S&P increased by almost 80% from its lows. Further, the stock is up almost 60% from the level it was at before the pandemic. However, we believe that Micron stock could rise more than 10% to set new highs above $100, driven by expectations of continued demand growth and strong Q2 2021 results despite the pandemic. Our dashboard What Factors Drove 191% Change In Micron Technology Stock Between 2018 And Now? has the underlying numbers behind our thinking.

The stock price rise since 2018-end came despite a 30% drop in revenue from $30.4 billion in FY 2018 to $21.4 billion in FY 2020 (Micron’s fiscal year ends in August). Net margins dropped from 46.5% to 12.5% over this period, as a drop in ASPs led to a drop in gross margins. Despite a 4% drop in outstanding share count, EPS dropped 80% from $12.27 in 2018 to $2.42 in 2020.

Micron’s P/E (price-to-earnings) multiple rose from 3x in 2018 to 31x by 2020 end, as the semiconductor supply glut cleared out, implying a rise in demand. The multiple has further jumped to 38x currently, in line with the rally in technology stocks. We believe that the company’s P/E ratio has the potential to increase more in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns have led to a rise in online activity as more and more people have started working from home. With streaming services seeing a surge in demand and people relying more and more on cloud storage, demand for physical storage devices has taken a hit. However, enterprise memory demand is rising, and this has led to a rise in overall memory device demand. This is evident from Micron’s Q2 2021 results, where revenues came in at $6.2 billion, a more than 30% jump from $4.8 billion in Q2 2020. A rise in COGS as a % of revenues, was canceled out by a drop in other operating expenses, and operating income jumped 1.5x to $663 million. This led to an equivalent rise in net income, and EPS jumped from $0.37 to $0.54 over this period.

Further, with the lockdowns being lifted, we believe the company will continue seeing strong revenue growth in the medium term, and if Micron Technology continues to successfully control expenses, profitability could rise further in the near to medium term. This will raise investor expectations, driving up the company’s P/E multiple. We believe that Micron stock can rise more than 10% from current levels, to set new highs above $100.

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