Key Points
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Micron has been posting stellar sales and earnings growth.
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The memory chip specialist is on the verge of a major stock buyback and could also deliver significant dividend growth.
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Investors should understand that the memory chip market has historically been highly cyclical.
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Micron Technology (NASDAQ: MU) is one of the world’s leading providers of high bandwidth memory (HBM) chips. These technologies are essential components in graphics processing units (GPUs) for artificial intelligence (AI) made by Nvidia, Advanced Micro Devices, and other players in the space.
The scaling of AI data centers is necessitating a surging number of GPUs, and these top-of-the-line processors feature memory chips from Micron. Demand for these HBM chips is very high, and production capacity is limited. As a result, Micron is selling out of all of the HBM chips it can have manufactured and also commanding incredible pricing power. With Micron’s current business setup in mind, here are two reasons to buy the stock and one reason to be cautious right now.
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Buy: Micron’s business results and outlook appear very promising
At the end of September, Micron published results for the fourth quarter of its last fiscal year — a period that ended Sept. 3. The company’s non-GAAP (adjusted) earnings per share grew more than 1,000% year over year to reach $33.42 — exceeding the average Wall Street analyst estimate target for per-share earnings of $31.61. Meanwhile, sales rose 379% year over year to reach $54.23 billion and beat the average analyst target for revenue of $51.07 billion.
The company’s forward guidance was even more encouraging. For the current quarter, the business is targeting non-GAAP (adjusted) earnings of $38.15 on sales of $61.5 billion. For comparison, the business recorded adjusted earnings of $4.78 per share on sales of $13.64 in last year’s quarter.
In addition to strong results and forward guidance in its recent quarterly update, other indicators suggest a promising demand backdrop for the company’s key products. SK Hynix is another top player in the HBM memory space, and its quarterly results published near the end of October point to very strong demand and pricing in the category.
Buy: Micron is gearing up for a huge capital return push
On Dec. 9, Micron will once again be eligible to begin buying back its stock. The company has been prohibited from buying back its own shares for nearly two years due to a stipulation connected to a loan it received through the CHIPS Act, but that restriction is now on the verge of expiring.
In conjunction with the lapsing restriction, Micron is poised to initiate a massive new capital returns program. The company has already disclosed that it has increased its buyback authorization to $35.16 billion and plans to return all excess cash to shareholders through share repurchases and dividends. Most of that will be in the form of stock buybacks, which boost the company’s earnings per share by reducing its outstanding share count, but there’s a good chance Micron will also deliver strong dividend growth.
Caution: The memory chip market has historically been highly cyclical
The broader semiconductor industry is subject to cyclical trends, and the memory chip market is even more prone to boom-and-bust cycles. Based on Micron’s forward price-to-earnings ratio of less than 5, the stock looks very cheap relative to the rate at which the company has been growing earnings.
Data by YCharts.
Even though Micron has secured long-term contracts with favorable margins, the market is pricing in a significant risk of a downturn in the red-hot memory chip cycle. If demand starts to soften and the AI valuation bubble deflates, Micron and other memory chip specialists could see big valuation pullbacks.
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Keith Noonan has positions in Micron Technology. The Motley Fool has positions in and recommends Advanced Micro Devices, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.
