Micron Technology (MU -4.33%) the stock has underperformed the market so far this year. Shares of the company have fallen sharply in recent months as doubts about the health of the memory market and Wall Street downgrades have taken their breath away.
However, it looks like investors are finally seeing some light at the end of the tunnel, with Micron stock having been in resurgence mode for the past few days. The stock has gained just over 5% since Aug. 20, indicating that investor sentiment may be improving. Let’s take a look at why this may be the case and whether Micron stock can finally turn the tide and end 2021 with a bang.
Robust demand for PCs, servers and mobiles will be a tailwind for Micron Technology
Research firm IDC recently reported that global shipments of personal computers (PCs) and tablets will remain strong in 2021. The company estimates 14.2% growth in PC shipments this year to 347 million units, while tablets are expected to register an increase of 3.4%. IDC points out that sales of PCs and tablets could have grown at a faster rate had there not been a supply shortage.
More importantly, the PC demand environment is expected to remain strong over the long term, with IDC forecasting 3.2% annual shipment growth through 2025. This paints a bright picture for the future of the DRAM market. PC (dynamic random access memory) which accounted for 13% of the global DRAM space at the end of 2020.
Likewise, server DRAM demand is expected to remain strong for the rest of the year and beyond thanks to the launch of new server processors as well as data center capacity upgrades. According to a third-party estimate, global server shipments are expected to reach 15.7 million units in 2025 from around 12.9 million units this year. More importantly, the rapid deployment of large-scale data centers to tackle AI (artificial intelligence), 5G and Internet of Things (IoT) workloads is expected to drive increased DRAM consumption of servers.
With servers accounting for 34% of the DRAM market, a healthy demand environment in this niche should keep the memory industry’s supply and demand balance in Micron’s favor. Moreover, smartphones account for 40% of the DRAM market, and this segment is also in great shape thanks to 5G smartphones which use more memory content than 4G devices.
All of this indicates that the DRAM market may continue to see healthy growth in the long term. This bodes well for Micron Technology, as 73% of its revenue comes from the sale of DRAM chips.
The NAND flash market hit a purple patch
Micron makes the rest of its revenue from the NAND flash business, and the good part is that this company has hit the gas. The growing demand for data center storage, consumer SSDs and mobile storage has recently led to a nice increase in NAND flash revenue.
Memory market research firm TrendForce reports that NAND flash memory revenue grew 10.8% quarter over quarter in the second quarter. The company believes NAND flash revenue could hit an all-time high in the current quarter, and it won’t be surprising to see the market sustain its impressive long-term growth thanks to a slew of catalysts.
For example, IDC estimates that the global SSD market could reach $51.5 billion in revenue by 2025. Unit shipments are expected to grow at a compound annual growth rate (CAGR) of 7.8% and revenues are expected to grow 9.2% annually throughout the forecast period, suggesting a favorable pricing environment.
On the other hand, the arrival of 5G smartphones leads to an increase in the average NAND flash content per smartphone. Counterpoint Research points out that the average NAND capacity of a smartphone exceeded 100 GB last year. The company adds that smartphone NAND flash consumption could triple by 2025 from 2021 levels.
So it’s clear that both of Micron’s end markets could experience secular growth in the future. That’s probably why investors looking for a high-growth company that’s trading at an attractive valuation are buying Micron stock. After all, Micron posted 36% year-over-year revenue growth last quarter to $7.4 billion and trades at just 20 times earnings, less than the S&P500is a multiple of 31.
DRAM and NAND market prospects indicate that it may continue its impressive growth in the future. Analysts are also optimistic about the company, whose earnings are expected to grow at a CAGR of over 63% over the next five years. Ultimately, it’s easy to see why Micron stock has been gaining ground lately, and don’t be surprised to see it rise higher going forward.