Has Micron Stock Gotten Tired?

NEW YORK (TheStreet) -- Concern surrounded Micron's (MU) fiscal second-quarter earnings report that arrived on Thursday. On top of its outsized success for more than a year, could the flash memory giant hold its momentum?

The company didn't disappoint. With year-to-date gains of 12%, and 250% gains since the end of 2012, investors had a lot riding on another strong performance. Larger-than-expected profit was in hand, but you couldn't tell by the initial reaction of stock buyers. Shares closed down 1.44%, to $24 a share, on Thursday.

Helped by a strong recovery in chip prices, Micron reported revenues of $4.11 billion, which grew 2% sequentially and beat estimates by 3%. But on a year-over-year basis, that number trumped last year's mark by 98%. That's not a typo. As with rival Samsung (SSNLF), Micron continues to benefit greatly from a strong resurgence in memory chip prices.

In the case of Micron, it's more than just an improved environment. Management has pushed all the right buttons for the past two years. The company posted 85 cents in adjusted earnings per share. Aside from reversing a year-ago loss of 28 cents, Micron beat consensus estimates by 12%. On a sequential basis, earnings were 10% higher than the January quarter.

After poring over the report, I wasn't able to find a single flaw in execution. Consider, Micron's business is based on flash memory, which consists of non-volatile storage technologies, NAND and NOR, that require no power to retain data. Both work the same but are different in functionality.

NAND, used in devices like MP3 players, retain more storage. By contrast, NOR, used in mobile phones, is faster. Micron arguably perfected this market. But over the past couple of years there have been of struggles. Micron was losing market share to both Samsung and SanDisk (SNDK). Making matters worse, the declining PC industry and soft average selling prices left investors no choice but to bail on the stock.


That's when management stepped up with some key deals to capitalize on the growing popularity of products built with solid-state drives. No deal was more critical that Micron's acquisition for bankrupt rival Elipida. Management was opportunistic and took risks that are paying strong dividends.

In the recent quarter, sales of DRAM products were much better than expectations. Surprisingly, DRAM prices were stable and volumes remained strong. As for the NAND side, revenue jumped 11% sequentially on 35% higher volume.

Essentially, Micron is capitalizing on stronger average selling prices. This is (in part) because management doubled-down on its investments to increase production outputs to fulfill the growing demand. This is even though rivals were still seeing weakness in volumes. This led to free cash flow jumping to $800 million, up from a loss of $100 in the year-ago quarter.

At the risk of sounding like I'm offering a "we're not worthy" level of praise, I can't say that I've seen better execution from any other company in this sector. Micron has gone from aggravating its investors with chronic "unfixable" deficits to worrying investors that it has gotten too popular.

With continued improvements in margin and cash flow, I don't believe investors have anything to worry about. The stock has done well. But it has been supported by solid metrics. Based on fiscal 2015 estimates, these shares still look cheap at only 14-times forward earnings.

At $24 per share, Micron stock should command a fair market value of $28 by the second half of the year.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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