Investors who are still unsettled about the state of the semiconductor industry have every cause to kick themselves for having missed out on Micron‘s (NASDAQ: $MU) impressive 240% gains in 2013.
While fears about high-end device saturation and weakening average selling prices ($ASP) were valid reason to avoid companies like Broadcom (NASDAQ: BRCM_), the situation, however, has been entirely different for Micron, which operates within the memory chip space. And as with Applied Materials (NASDAQ: $AMAT) and SanDisk (NASDAQ: $SNDK), this entire subset continues to enjoy above-average economic returns.
[Become a Better Investor in 14 days: Click for Your Free Trial]
As I’ve said recently, while I’ve been a firm believer in Micron’s turnaround potential, particularly due to its strategic shift to higher growth markets like network enterprise, I do wonder how long this resurgence can continue. Not just with Micron, but for the entire industry.
Upon Wednesday’s release of first-quarter earnings, management did its best convening job yet (even with the stock being up close to 250% from its 52-week low). Analysts were looking for 44 cents in earnings per share on revenue of $3.7 billion, which would represent year-over-year revenue growth of 103%. That’s not a typo. Essentially the Street was looking for confirmation that Micron deserved its 2013 gains.
With first quarter EPS and revenue surging 165% and 120%, respectively, Micron management answered the call with authority. Equally, and perhaps more impressive than the 69% year-over-year jump in DRAM revenue, was the 7% sequential improvement in gross margin, which registered at 32%. This tells me that management has, in fact, begun to extract value from the Elipida acquisition.
This once unpredictable industry, now consolidated to four major suppliers, is starting to reveal that long-term profitability is indeed realistic. And with Micron growing earnings and cash flow at astronomical levels, if there were any doubts that the company can maintain its momentum against a surging Samsung ($SSNLF), this, too, was put to rest with management raising guidance.
Micron CEO Mark Durcan offered the following regarding the company’s drastically improved inventory situation:
“Our belief is that this tight and further declining inventory situation coupled with balanced long-term production and demand to continue to drive healthy market conditions.”
These are pretty encouraging words, especially from a company that just demolished all expectations. Micron understands the leverage and competitive advantages it attained as a result of the Elipda and Rexchip deals, which boosted manufacturing capacity by roughly 45%.
Still, investors have to be careful about getting ahead of themselves. The “easy money” on this stock has already been made. While Micron continues to be an incredible turnaround story, the Street has a tendency to be fickle and demand more from the company in terms of organic growth, even if we are a full fiscal calendar away from such demands.
[Read: Can BlackBerry Be Trusted?]
Even so, the mystery and “underdog” role that Micron thrived upon are no longer in play. This stock is not going to sneak up on anyone anymore.
I believe making a play here on this stock now requires one to be able to accurately model the cash flow Micron will be able to produce in the next 12 to 18 months. And you have to assume that either SanDisk or Samsung won’t execute in a manner that disrupts Micron’s momentum.
Having said all that, I’m going to hold firm to my $28 price target for the second half of the year, if not sooner. That’s 15% above Micron’s recent closing price.
I can’t say that I’m as excited about this stock today as I was when it traded in the teens. I still believe in Micron and its management. I just don’t trust the Street to not screw this up.