MU Stock Forecast: Micron Is Still Relatively Undervalued And DRAM Prices Will Remain High

motek 1The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First

Micron Is Still Relatively Undervalued And DRAM Prices Will Remain High

Summary:

  • I made a buy recommendation for Micron last August 22. The stock has since returned +21.48%.
  • I previously expected MU to breach $35 before 2017 ends and it already happened. It posted a new 52-week high of $36.60 this week.
  • Micron is still a buy. This company’s stock is still relatively undervalued compared to its sector/industry peers.
  • This DRAM/NAND company will report its Q4 earnings on September 22. I expect it to beat street estimates.
  • I expect MU’s upward market trend to continue well into 2018. I Know First has very bullish near and long-term algorithmic forecasts for this stock.

Those of you who heeded my August 22 buy recommendation for Micron (MU) would have already reaped notable rewards. MU’s price has shot up +21.48% since last month. It also posted a new 52-week high of $36.60 this week, fulfilling my prediction in August that Micron’s stock can breach $35 before 2017 ends. Micron will do is Q4 FY2017 earnings report next week. The general bullish sentiment for Micron is justified. DRAMeXchange reported last September 20 that DRAM (Dynamic Random Access Memory) supply will remain tight until 2018.

 

(Source: Google Finance)

Micron achieved record revenue in Q3 FY 2017 partly because of strong demand for PC DRAM and mobile DRAM during the April to June quarter. This led to higher prices for DRAM products and creating a tight supply situation. The persistent short supply of DRAM products was also aggravated by a stronger PC demand provoked by new processors and GPUs (Graphics Processing Units) from Intel (INTC) and Advanced Micro Devices (AMD).

The Christmas and Black Friday shopping frenzy is coming soon. PC vendors will bid higher for DRAM contract prices to make sure they have enough supply to build desktop PCs and laptops in time for Q4 2017’s holiday shopping season.

DRAM Prices Will Remain High

DRAMeXchange’s outlook that DRAM supply will remain tight until next year means Micron can enjoy higher prices for its PC, server, and mobile LPDRAM products. DRAM contributes 64% of Micron’s revenue. DRAM spot prices continue to soar and MU’s price is benefiting from this situation.

The firms involved in DRAM manufacturing enjoyed notable increases in revenue over the last four past quarters. Micron saw its DRAM revenue grow from $1.73 billion in Q2 2016 to $2.96 billion in Q1 2017. Like oil producing countries, DRAM producers like Samsung (SSNLF), SK Hynix, and Micron are also not in a hurry to increase production. They make more money by keeping the supply tight during these days of great demand for DRAM.

As per the Q3 FY 2017 ER (Q2 of 2017) of Micron, its DRAM sales grew 5% Q/Q. Last quarter’s gross margin on DRAM was also 54%, notably higher than Q2 FY2017’s 44%. I expect next week’s ER to also post another 5% or more Q/Q growth and 55% gross margin for DRAM.

Apple’s (AAPL) iPhone 8 is causing a short-supply on DRAM and NAND since June. This smartphone’s production will continue to keep DRAM and NAND prices high. As far as I know, Apple still sources out its iPhone’s LPDRAM from Micron’s subsidiary Elpida. The release of other flagship smartphones from Android device manufacturers eager to challenge the iPhone 8 and iPhone X will further aggravate the already tight supply for DRAM.

Micron Is Still Undervalued

The big rally for Micron is also because it is still relatively undervalued compared to its sector/industry peers. I used FundamentalSpeculation’s algorithm and found out that MU deserves more love from investors. The chart below illustrates clearly why Micron has more upside potential. Micron has conspicuously lower P/E, P/S, PEG ratios than its peers in Technology sector and Semiconductors industry.

 FundamentalSpeculation has a fair value price of $49.82 for Micron’s stock. This was derived by algorithmic calculations comparing the average valuation ratios of comparable companies with similar business fundamentals to Micron. I will already be happy if MU hits $40 within the next six months.

Conclusion

Going long on Micron while it still trades below $37 is a reasonable action. The persistent tight supply for DRAM and NAND products is very favorable to Micron’s topline and bottomline. Despite its recent surge in price, this stock remains an obvious value play. Micron remains relatively undervalued compared to its business peers.

My buy recommendation for Micron’s stock is in line with its positive near and long-term algorithmic forecasts from I Know First. It is important to note that I Know First has very high predictability score on Micron’s stock trends. The 0.85 predictability score for the one-year algorithmic forecast for MU means I Know First’s stock picking algorithm has a long history of correctly predicting Micron’s stock movements.

Past I Know First Success With MU

I Know First has been bullish on MU shares in past forecasts. On September 2, 2016, I Know First released a bullish article for MU. Micron was expected to benefit from improving average prices for DRAM and NAND Flash over the coming quarters.  The forecast was increasingly bullish going out one month, three months, and even one year.  One year after the initial forecast and MU shares have gained 97.46%. See chart below.

(Source: Google Finance: MU)

This bullish forecast for MU was sent to I Know First subscribers on On September 02, 2016. To subscribe today click here.

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.

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