Memory chips are an important part of semiconductor manufacturing. They are a commodity, meaning prices are highly dependent on supply and demand, but also an indicator of the direction of the semiconductor industry as a whole, as they are used in the construction of more complex computer systems.
Micron Technology (MU -1.60% ) is one of the leaders in this area of the electronics world, and it had an excellent second quarter of fiscal 2022 (three months ended March 3, 2022). Micron itself still looks like an undervalued stock amid a global chip shortage, and the global imbalance between limited chip supply and growing demand indicates that this deficit will likely persist for some time to come.
Industry is hungry for digital memory
Micron released quarterly financial data that easily topped its own guidance provided three months ago. Revenue was $7.79 billion (up 25% year over year) and adjusted earnings per share was $2.14 (up 118%). The company generated free cash flow of $1.03 billion during the period and ended the second quarter with $10.2 billion in cash and short-term investments and debt of $7.08 billion. dollars.
CEO Sanjay Mehrotra and the management team released third quarter guidance that shows the momentum is set to continue. At the midpoint of expectations, revenue is expected to grow 17.5% year-over-year and adjusted earnings per share is expected to grow 31%. Management expects the price of memory chips to increase by a double-digit percentage for the remainder of fiscal 2022 compared to 2021.
There was one notable problem: Russia’s invasion of Ukraine. As the Semiconductor Industry Association (SIA) pointed out last February, the region is a key supplier of elemental gases (including neon) used in chip manufacturing. Micron echoed the SIA’s comments, stressing that there is no immediate impact on supply as it has sufficient short-term inventory. However, as he secures a longer-term supply elsewhere, he sees an increase in the costs associated with these purchases.
But another supply chain disruption aside, Micron is on course for a banner year for sales. Industries around the world need more chips than ever before, so it looks like we’re still a long way from the end of the chip shortage.
Another decade of secular growth?
When it comes to the specifics of what drives the need for more memory, the end markets are diverse. Mehrotra mentioned 5G mobile networks. New phones with 5G need a lot more memory as apps become more complex and data-intensive. Data centers are another area of rapid expansion. GPUs (graphics processing units) like those developed by Nvidia (NVDA -1.46% ) and AMD (AMD -8.29% ) need huge amounts of data to accelerate the computation of AI and cloud-based services. Micron is also a leading supplier.
Automotive and other industrial applications are expected to be the fastest growing segments for Micron over the next decade. The automotive industry and its migration to electric vehicles (EVs) in particular is expected to be a massive secular growth trend that benefits the memory chip maker. Mehrotra pointed out that some high-end electric vehicle models require about $750 of memory per vehicle, about 15 times more than the average internal combustion car. That’s not to say that all EVs will need this much memory, but it does illustrate the looming demand ahead. With tens of millions of vehicles sold each year, and with many set to go electric in the 2020s, Micron will have no shortage of new outlets.
This does not change the fact that Micron is a manufacturer of a basic technological building block. As a result, the stock will remain a highly volatile bet on the semiconductor industry for the next decade. However, there are secular growth trends at play that should keep financial stocks up over the long term. Trading just under 10x past 12-month adjusted earnings per share, Micron still looks like a buy to me.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.