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Bull of the Day: Micron (MU)

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Micron (MU - Free Report) delivered another exceptional quarter of record revenue and profits on March 22 and analysts responded with further boosts to their estimates for coming quarters.

The upward EPS estimate revisions weren't especially dramatic in the past few weeks, with the current fiscal year (ending August) only rising 3.4% from $10.63 to $10.99.

But that's because the analysts were already busy before the company's report moving the consensus from $10.13 to $10.63 on Micron's updated guidance for fiscal Q2 released on February 5.

My colleague Tracey Ryniec, editor of the Zacks Value Investor where she's owned MU shares since March of 2017 at $29, wrote on Feb 9 about the company's update that offered promises for another terrific quarter. And here were the goods...

Fiscal Q2 2018 Highlights

  • Revenues of $7.35 billion, up 58 percent compared with the same period last year
  • GAAP net income of $3.31 billion, or $2.67 per diluted share
  • Non-GAAP net income of $3.50 billion, or $2.82 per diluted share
  • Operating cash flow of $4.35 billion, compared with $1.77 billion for the same period last year

 

"Micron executed exceptionally well in the second quarter, delivering record results and strong free cash flow driven by broad-based demand for our memory and storage solutions. Our performance was accentuated by an ongoing shift to high-value solutions as we grew sales to our cloud, mobile and automotive customers and set new records for SSDs and graphics memory," said Micron President and CEO Sanjay Mehrotra. "Secular technology trends are driving robust demand for memory and storage, and Micron is well-positioned to address these growing opportunities."

Extreme Value, Concerns About Supply

While the outlook for this fiscal year is no doubt fantastic -- that $10.99 EPS represents 121.6% growth while the top line comes in at $29.16 billion for a whopping 43.5% sales advance -- next fiscal year isn't as bright.

Full-year 2019 EPS (starting in September) has risen 13.7% from $8.67 to $9.86 in the past 60 days. But that represents a decline of 10% year-over-year on the bottom line.

What's the problem? It basically revolves around supply. Many experienced semiconductor analysts have seen this part of the cycle before where memory becomes abundant and prices drop.

But currently, the story is just the opposite for Micron. They can't keep up with demand for DRAM and NAND flash products.

The alternative bearish view is that customers will cancel orders that can't be filled.

Either way, the analysts aren't willing to stick their necks out on next year's prospects, no matter how cheap the stock looks.

Memory suppliers typically trade with value P/Es in the single digits and Micron is currently trading at just 5 times current estimates, even into next year.

Memory Creates the Future

Until analysts have a firmer grasp on the supply and demand outlook for next year, let's just focus on the business outlook according to the company.

Micron is an industry leader in innovative memory and storage solutions. Backed by nearly 40 years of technology leadership, their memory and storage solutions enable disruptive trends, including artificial intelligence, machine learning, and autonomous vehicles in key market segments like cloud, data center, networking, and mobile.

This description from the company website helps put their business into the context of the larger technology world...

The world is moving to a new economic model, where data is driving value creation in ways we had not imagined just a few years ago. Data is today’s new business currency, and memory and storage are emerging as strategic differentiators that will redefine how we extract value from data to learn, explore, communicate and experience.

You may have noticed that this Technology/Semiconductor cycle seems longer and more robust than those before mobile, before the cloud, before the ramp in automation and AI.

In November I did a subscriber-only video presentation for Zacks Ultimate members where I debated our Director of Research Sheraz Mian on the merits of the idea that "This Time is Different." I argued in the affirmative and called the current rally a function of The Technology Super Cycle. That link will take you to my December Zacks Confidential, a full written report on the phenomenon.

My top two Semiconductor recommendations at the time were NVIDIA (NVDA - Free Report) and Lam Research (LRCX - Free Report) to capitalize on the former's leadership of burgeoning AI industries and the latter's command of the "picks and shovels" to create silicon gold with high-tech wafer fabrication equipment (WFE), along with peer Applied Materials (AMAT - Free Report) .

So in late December, I was excited to hear Micron CEO Sanjay Mehrotra talk about similar themes. Here's what I wrote to my TAZR Trader members on December 20...

I happened to catch the CEO of MU on Squawk Alley this morning, interviewed by the excellent Jon Fortt, and it was a clinic in not only the specifics of DRAM and NAND flash semis but also a wider commentary on my Tech Super Cycle. Here's the video link that you should watch if you consider yourself any kind of Semi investor...
 
"We have barely seen the tip of the iceberg in Artificial Intelligence."

As long as Mehrotra and Co. keep executing at the heart of Technology and delivering superior growth, I'll keep listening to them.

Disclosure: I own shares of MU, NVDA, and AMAT for the Zacks TAZR Trader portfolio.

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