Calling Micron's performance "impressive" would be an understatement. Investors that passed on this company over fears about high-end device saturation and low average selling prices are deservedly kicking themselves. This chip has sailed.
But no time for regret. The more pressing question has to do with current investors. There's no doubt that they've done well. Nine months remain in the year, so how much gas does this stock have left? Management has pushed all the right buttons. But with chip names like Broadcom (BRCM) still seeing weakness, should Micron investors press their luck?
Micron will report second-quarter earnings Thursday. The Street will be looking for earnings of 74 cents a share on revenue of $3.975 billion. This suggests year-over-year revenue growth of 91%. That's an imposing revenue number, supported by what the company has done recently.
In the January quarter, Micron demolished revenue estimates with 103% year-over-year growth. Equally remarkable was the 69% year-over-year jump in DRAM revenue. I don't want to downplay this sort of performance, but we need to keep it in perspective.
Micron's business is based on flash memory, or non-volatile storage technologies that requires no power to retain data. Micron has capitalized on the growing popularity of products built with solid-state drives. And management has doubled-down on their investments to produce SSD devices to fulfill this demand. It's been a great strategy.
But Micron's revenue surge and the company's impressive gross margin has been the result of two well-timed acquisitions. First, was management's decision to pick off bankrupt rival Elipida. The deal, which closed last year, immediately turned Micron into a part supplier for Apple (AAPL).
Around the same time, Micron management completed its acquisition for a 24% stake in Rexchip Electronics, a savvy move giving Micron a total of 90% ownership in Rexchip. Elipida had already owned a 65% in Rexchip when it was acquired by Micron.
What's more, the key result of these deals was that Micron now owned all of Rexchip's product supply, increasing Micron's manufacturing capacity by roughly 45%. When all was said and done, Micron's management achieved in two separate deals what some companies are unable to execute in a decade.
As it stands, what was once an unpredictable industry led by a rejuvenated and motivated company. With Micron growing earnings and cash flow at unprecedented levels, there's no question management placed the right bets with its acquisitions. Micron now has strong operational leverage and above-average competitive advantages. Rivals like Samsung (SSNLF) and SanDisk (SNDK) have much to fear.
From an investment perspective, investors still holding this stock have some decisions to make. These aren't measly gains that Micron has produced. Analysts who misjudged this company are likely to raise question about organic growth. During the conference call, they'll press management for details about Micron's performance outside of its two acquisitions. And these are valid points.
But these inquiries should not supersede impressive metrics like free cash flow, which underscores the real health of Micron's business. In the January quarter, Micron reported just under $1 billion in free cash flow and 77 cents in earnings per share. This beat Street estimates by a stunning 75%. That's not typo.
Micron management has pushed all the right buttons the past couple of years. And I don't expect them to misfire. With the stock trading at around $23, fair market value points to $28 by the second half of the year on the basis of free-cash-flow growth and margin expansion.
At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.