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Is Micron Technology a Purchase?

Manufacturer of memory chips Micron technology (NASDAQ:MU) is messing around these days. The stock has more than doubled in 52 weeks, including a 27% increase in the past month alone.

It’s nice to see a historically favorite stock achieve record share prices and return to valuation ratios not seen since the height of the dot-com bubble, but will Micron’s stock remain at these lofty heights? Is Micron’s price rise based on solid ground or shifting sands?

Actually, I’m not so sure.

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Building blocks of the digital age

Micron is a leading maker of memory chips. The product range includes many popular memory types, from the short-lived but fast DRAM used in every computer system to the more permanent NAND chips (formerly known as flash chips) that form solid-state storage solutions with higher performance than classic hard drives.

Both DRAM and NAND chips are currently in high demand. Artificial intelligence (AI) systems require a huge amount of high-speed DRAM capacity, and they also need a lot of speed-sensitive long-term storage. At the same time, smartphones are starting to sell again after a few years, while consumer interest is low – and recent flagship models with special AI features can use twice as much DRAM as a comparable device without AI features.

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Micron enjoys strong end-market demand and solid revenue streams. And management expects the good times to continue for a while.

“We believe Micron is one of the semiconductor industry’s biggest beneficiaries of the multi-year opportunities that AI enables,” CEO Sanjay Mehrotra said in a prepared statement.

The shipping volume therefore increases. At the same time, the semiconductor industry continues to face supply-side shortages. That may sound like bad news, but a tight balance between supply and demand leads to higher unit prices for the limited number of memory chips on the supply side. As a result, Micron’s revenue is soaring even as unit volumes decline. For example, shipment volume of NAND products fell slightly between the first quarter and the second quarter of fiscal 2024. But regardless, NAND revenues rose 27%.

Overall, Micron’s DRAM sales rose 54% year over year, while NAND sales rose 81% over the same period.

Don’t forget the long-term trends in the memory sector

At the same time, Micron is not currently setting any company records. It operates in a brutally cyclical industry, and the downturn that began with the inflation crisis may not be over yet.

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Revenue over the past four quarters totaled $18.3 billion, far behind the record $33.4 billion set two years ago. Free cash flow also rose in 2022, but fell back into negative territory early last year. The company is currently consuming cash and not putting cash profits into deep pockets.

MU Earnings Chart (TTM).

MU Earnings Chart (TTM).

In other words, Micron’s stock price is currently rising on somewhat weak wings. Bullish investors expect years of AI-driven business success, shaking off the potential headwinds of an unpredictable global economy and the seemingly endless lack of chip manufacturing capacity.

For me, Micron has been a fantastic moneymaker in the long run. The stocks I bought in the summer of 2011 are up 1,200% year to date, while the dividend-adjusted stocks S&P500 index “only” increased by 400%.

I don’t plan to add any more Micron stock at this time as the stock may be overdue for a correction. The recent price increase seems overly enthusiastic. It makes more sense to sell a few shares (but not close the entire position) and convert some of my Micron profits into cheaper ideas. My favorite investment period may be “forever,” but there’s nothing wrong with rebalancing limited mutual funds every now and then.

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Should You Invest $1,000 in Micron Technology Now?

Consider the following before purchasing shares in Micron Technology:

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Anders Bylund has positions in Micron Technology. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Is Micron Technology a Purchase? was originally published by The Motley Fool

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