VIDEO In December, I wrote a special report for Zacks Confidential titled "The Technology Super Cycle." Today, in this article and the embedded video, I weave some excerpts of that report into my observations about Micron ( MU - Free Report) and their recent Investor/Analyst Day that inspired research analyst Kevin Cassidy of investment bank Stifel Nicolaus to raise his price target on the stock to a Street-high $106. My summary idea of The Technology Super Cycle was this: Innovation is driving earnings growth in unseen productivity and efficiency that keeps inflation low and investment high. Every smart tech analyst on Wall Street is always looking for good ole' pc-driven technology to still be "cyclical" and inevitably peaking soon, and so they have been busy climbing over the top of each other to be the first to "call the top" quarter after quarter. But they've been wrong ever since the Goldman Sachs analyst downgraded Broadcom (AVGO) in October of 2014 at $70. And I've been buying stocks like that ever since, quarter after quarter. In fact, I led my Zacks followers in AVGO profits all the way to $250. Why So Many Miss the Exponential Revolution Trying to Pick the Top of the Cycle We are all aware on some level that technology innovation is changing our world, and the global economy, at ever faster rates. But have the impacts for technology investors become stretched, over-valued and about to decline? Both as citizens and investors we benefit from high tech: smartphones, apps, the cloud and HPC (high performance computing), semiconductor efficiency and software automation, biotechnology and even advanced energy tech like fracking. But we haven't really seen this powerful growth show up in the GDP of our 2% economy for the past 8 years or so. It's almost as if you could believe the pessimists who say that technology innovation is somehow hurting economic productivity by burdening us with systems that are complex to learn, susceptible to failure, and vulnerable to hacking. Or maybe they think that productivity only causes jobs to go overseas and profits and wages to go down. But in mid-November I offered a better answer to Zacks Ultimate members in our monthly ZU Strategy Session. In the "Agree to Disagree" segment, I challenged our Director of Research to a debate about whether "This Time Is Different" with respect to growth and equity valuations. My thesis: Technology was actually accelerating growth but we didn't see it in government data because productivity was also accelerating in ways uncaptured (or unpublicized) by the Bureau of Labor Statistics, thus changing both the numerator and the denominator of several derivative measurements. In more detail in my December report The Technology Super Cycle, I broke the "problem" down into two distinct and very important puzzles: productivity and inflation. Here's how I cracked the codes of these missing links... Missing Link #1: Productivity As I explained to investors over the past 10 years why we still needed to buy Tech and Biotech growth, there was one piece of the puzzle that I couldn't quite explain: if innovation was so high, why wasn't GDP higher? That's when I found the answer from Brian Wesbury in the summer of 2017: productivity, defined as Change in Outputs / Change in Inputs, has over 40% of the numerator dominated by Federal and State/Local government in the equation! Those areas do not produce productivity. Nor do their subsidies. In the video that accompanies this report, I share a wonderful bit of serendipity as Wesbury provided some great research "artillery" on the very same day I published my report, December 11, with his report “The Fallacy of Weak Productivity.” Missing Link #2: Inflation While I felt lucky to have this great update from Wesbury on the day of my report, I also felt incredibly fortunate to discover an article by the chief economist of Vanguard two weeks ago (November 27, 2017) which completed my economic thought process about technological productivity. Dr. Joseph H. Davis titled his piece something very simple and provocative... The Federal Reserve versus Moore’s Law. In the piece, Dr. Davis further describes how semiconductor power, efficiency, and miniaturization keep shrinking the cost -- and increasing the productivity -- of everything. Here is an excerpt... “Moore’s Law is about more than smartphones, TVs, and Amazon Prime. Its knock-on effects restrain the need for higher prices in every corner of the economy, not just in high-tech products. Prices are a markup over marginal costs, and in an increasingly digitized world, that marginal cost inches closer to zero. That’s the story told by our analysis of detailed industry data from the U.S. Bureau of Labor Statistics and the U.S. Bureau of Economic Analysis.” Also in the video and my December report, I explain why NVIDIA ( NVDA - Free Report) CEO Jensen Huang says we have entered a new super-charged version of Moore's Law with GPU chips that create massively parallel architecture for data processing. You can learn more in my video Get Your MPA In Deep Learning. Memory Creates the Future 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. My top two Semiconductor recommendations in my December Technology Super Cycle report were NVIDIA 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) . Lam and AMAT are highly-dependent on the cap-ex budgets of Micron, Samsung, and Intel and their demand for WFE exceeding $60 billion this year keeps these stocks attractive as both growth and value plays. 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. (end of TAZR excerpt) Micron Feeds the Mega Memory Monster On Monday May 21, Micron held an Investor/Analyst Day in New York where CEO Sanjay Mehrotra dropped a Godzilla-size 150-slide deck on Wall Street. Analysts will still be digesting it all this week. In fact, as I type this, Needham and Co. just raised their price target on MU shares from $76 to $100. In the video that accompanies this article, I go over the other two banks who've been competing this spring for the Street-high target on MU shares. More importantly, I explain the "valuation" conundrum that i-bank analysts have with a memory chip maker trading at 5 times when everyone is calling the top of the cycle. More importantly, I present several of Micron's slides from the presentation deck that sum up not only the growth prospects for MU but the wider implications for The Tech Super Cycle, including the $1.5 trillion market for “smart” cities. Finally, let me remind you about a little memory maker that I call Micron's "lil' brother." SMART Global Holdings ( SGH - Free Report) is a $1 billion DRAM and NAND flash maker that serves several global markets, with a concentration in Brazil memory and mobile applications. The company is expected to deliver $1.4 billion in sales and $6.78 in EPS next fiscal year beginning September. Thus it trades much cheaper than Micron on a price-to-sales basis that make its slight P/E premium at nearly 7 times still very attractive. Speaking of Semi P/E multiples, you might want to also check out my article from last week: Do You Buy NVIDIA at This Valuation? Disclosure: I own shares of MU, NVDA, LRCX, and SGH for the Zacks TAZR Trader portfolio. Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click "Follow Author" above to receive his latest stock research and macro analysis.
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