This article is the second in a series of four articles dedicated to following up on our October 15, 2013 article "4 suppliers and an ETF set for Apple boost", whereby we recommended buying Apple, Inc. (AAPL) in addition to its suppliers Skyworks Solutions Inc. (SWKS), Qualcomm Incorporated (QCOM), Micron Technology Inc. (MU) and Broadcom Corp. (BRCM). Furthermore, we also recommended buying Vanguard total stock market index fund (VTI).
Since the publication of such article, Micron shares have appreciated by 110.6% (on a dividend and split adjusted basis) from $17.07 on October 14, 2013 to $35.95 on November 28, 2014. In the first article of the series, "Up 169%, is Apple supplier Skyworks still a buy?", we provided our current outlook on Skyworks, while we also provided the performance of all of the above referenced stocks since the publication of our 2013 article, whereby Skyworks has appreciated by 169.45% , Apple has appreciated by 72.36%, Broadcom has appreciated by 64.56%, Qualcomm has appreciated by 10.44% and the Vanguard total stock market index fund has appreciated by 21.9%. Furthermore, we also provided a comparison to the major stock indices whereby the Dow Jones industrial average has appreciated by 15.51%, the S&P500 index has appreciated by 20.9%, and the NASDAQ index has appreciated by 25.59%.
Micron shares have more than doubled. Is this a good level to book profits by selling Micron shares, or could there be additional meaningful appreciation?
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Micron stock performance 10/2013 to 11/2014 vs. Indices - Source: Yahoo Finance
As per our October 2013 article, Micron designs and builds advanced memory and semiconductor technologies including dynamic random access memory products (DRAM). Furthermore, in July 2013, Micron solidified its position as a major supplier to Apple through the completion of its purchase of Elpida Memory, a DRAM supplier to the smartphone and tablet market. Micron/Elpida chips can be found in Apple's products including the iPhone 5c, as well as iPhone6 which contains Micron EDF8164A3PM-GD-F 1 GB LPDDR3 SDRAM Memory. Elpida DDR3 SDRAM is found in the first-generation iPad Air, while Elpida/Micron Technology F8164A3MD 2 GB RAM can be found in iPad Air2.
Micron's market capitalization currently stands at $38.59 billion, up from $17.64 billion in October 2013. With average analysts' earnings estimates of $3.72 per share for the year ending August 2015 and $4.14 for the year ending August 2016, Micron currently boasts forward price/earnings ratios of 9.66 and 8.68 respectively. Micron is expected to generate revenues of $18.48 billion in 2015 and $19.65 billion in 2016. In October 2013, Micron was expected to generate $2.06 per share in earnings for the year ending August 2014, while actual results came in at $2.71. During the past 90 days, Micron's average analysts' earnings forecast have increased by 25 cents for 2015 and 31 cents for 2016.
Micron's DRAM global marketshare is estimated to be about 23.7% as of Q3 2014, while its mobile DRAM share is estimated at 19% and NAND Flash memory share is estimated at about 12.3%. DRAM revenue growth is estimated at about 26.3% for 2014 by Gartner, hence providing a clue to Micron's steep stock price appreciation in 2014. Meanwhile, Gartner also forecasts an upcoming wide fluctuations in DRAM prices through 2016, as the industry enters a cyclical early-bust cycle driven by oversupply. Gartner's revenue growth forecast for 2016 DRAM industry is a mere 1%.
Due to the above referenced expectations for upcoming revenue growth slowdown in 2016, Micron's forward P/E ratio has remained muted at 8.68 for the year ending August 2016, despite Micron's stock price having more than doubled.
As we examine the potential performance of Micron shares during the next several months between December 2014 and June 2015, it is important to examine how they have performed on a seasonally adjusted basis in the past (although it is important to note that past performance is not necessarily indicative of future performance). As per below table, during the past 10 years, Micron shares appreciated by an average of 21.6% from December 1 to July 1 of the following year. However, Micron shares actually depreciated in 6 out of 10 such years, while such average was predominantly driven by the gains of 2009 and 2013. Meanwhile, during such 10 years, Micron shares appreciated by an average of only about 6.01% from July 1 to December 1 of the same year, with an appreciation in 5 years, and a depreciation in the other 5 years.
Such seasonal data is not necessarily very conclusive, although given recent gains, it does seem that the odds are against a sizable appreciation in Micron's shares during the next 6 months.
Micron Stock Seasonal Performance
December to July Change
July to December Change
Micron Stock performance 2004 to 2014 - Data Source: Yahoo Finance
As in the case for Skyworks, there could be also be some technical headwinds due to Micron shares' 14-day relative strength index (RSI) of 72.52. Such momentum index is typically between 0 and 100, and whenever it drops below 25, it typically indicates that shares are oversold, while at levels above 75 it indicates that shares are overbought. Hence, technically speaking, it does seem that Micron shares are overbought in the short term as they are approaching an RSI of 75, due to their latest rapid appreciation, and hence, there could be a short-term risk for such shares to either drop slightly or possibly remain at current levels.
On the other hand, a closer look at the below chart also provides periods during the past year whereby the RSI was elevated, and yet Micron shares continued to trade higher, as in the period between April and May of 2014.
Despite Micron's substantial appreciation since October 2013, its valuation continues to look attractive due to its forward P/E ratio of 8.68 for the year ending August 2016. Furthermore, as we are currently expecting Apple revenues to exceed estimates by about 8%, as per article we published 11/25/2014 "Apple: $800 done, $1,000 pre-split next?", such expectations will also provide support for Micron's chips. We believe such factors may actually overcome seasonal, technical, and cyclical factors for Micron which may act as headwinds, and hence we would actually continue to be a buyer of Micron at the current price level.