These factors make Micron (MU) stock a tempting investment

One of the main issues the technology sector is currently facing is the severe shortage of microprocessors, owing to demand growth spurred by the fast-paced digital adoption across industries. That explains the impressive financial performance and resilience of chipmaker Micron Technology Inc. (NASDAQ: MU) last year. With the demand-supply gap widening, the prices of dynamic random access memory [DRAM] are moving up steadily — a trend that is expected to stay until normalcy returns to the market.

After a successful start to fiscal 2021, Micron is all set to publish second-quarter numbers Wednesday after the closing bell. Analysts have been bullish on the company’s financial performance. They see earnings more than doubling to $0.94 per share supported by a 29% growth in revenues to $6.2 billion, which is broadly in line with the company’s revised projection. Given the positive market conditions, the management is likely to issue strong guidance for the remainder of the year.

Buy MU?

Micron’s shares, an all-time favorite among investors, have become more attractive after the recent pullback, especially at a time when all the key factors are in the company’s favor. Those buying the current dip can expect decent returns post-earnings. The target price, which points to a 30% upside, adds to the long-term prospects. The stock was on an upward spiral when the tech sell-off disrupted the rally last week.

The COVID-driven digital shift aggravated the supply crunch the memory market has been experiencing for quite some time, with services providers in the data-center, cloud, and PC industries expanding their capabilities to meet new orders. Recent innovations in the automotive industry, like self-driving and EV technology, and the aggressive 5G ramp also contributed to the chip shortage.

The Memory Boost

Besides the strong order book, the company is poised to benefit from the favorable pricing scenario – NAND prices are forecast to go up this year, following the steady pickup in DRAM prices. While continuing the dominance in DRAM technology, Micron is also strengthening its foothold in NAND. The company claims to have developed and started shipping what it calls the industry’s first 176-layer NAND chip.

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Related: Micron Technology Inc Q1 2021 Earnings Call

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The Cons

That does not make Micron’s business entirely risk-free because the lion’s share of orders come from China, which is facing the ire of the US administration for engaging in allegedly dubious trade practices. Also, the semiconductor business is cyclical in nature, which makes it more volatile than the majority of other industries.

From Micron’s First-quarter 2021 earnings conference call:

“In data-center, cloud and AI will drive long-term growth, with memory and storage becoming an increasing portion of server BOM cost. New compute architectures are enabling more memory channels and higher-density modules, contributing to increases in server memory content. Micron is positioned for success in this market, with a broad portfolio of high-bandwidth, high-quality and power-efficient products.”

In early January, Micron’s stronger-than-expected first-quarter report and bullish guidance spurred a rally and the stock made solid gains in the following sessions. Aided by an impressive performance by the main operating segments, revenues grew in double digits to $5.8 billion in the November-quarter and beat the estimates. As a result, adjusted profit surged 63% to $0.78 per share, exceeding the forecast.

The stock maintained the uptrend and this month climbed to the highest level in more than two decades, before losing momentum. It has gained about 19% since the beginning of the year. The shares closed the last session higher but traded slightly lower in the early hours of Monday.