Micron (NASDAQ:MU) seems to have become a battleground stock, with some analysts predicting that the company will get hit hard by a recession and others convinced that MU stock will actually be helped by the outbreak of the coronavirus from China.
For a few reasons, including the company’s high exposure to artificial intelligence, the stock’s relatively low valuation, and my belief that coronavirus’ spread will slow sooner than expected, I think medium- and long-term investors will benefit by buying MU stock at its current levels.
When the chip sector suffered downturns from 2008 until 2019, average estimates for companies in the space fell by a huge 70%, Citi analyst Christopher Danely warned recently. Moreover, he wrote that the estimate cuts for Micron tend to be among the largest in the sector. That’s all very bad news for Micron.
But on the other hand, the analyst contended that Micron “might buck the trend” this time because of its strength in DRAM memory chips and server chips (DRAM is used in desktop computers, mobile phones, and servers).
Demand for servers has remained strong during the coronavirus outbreak because more people are working at home and using internet services more frequently, Danely stated.
More upbeat is KeyBanc analyst Weston Twigg, who wrote that “memory companies could be reasonably well-positioned amid (the) coronavirus outbreak.” Given “limited supply” and “strong datacenter demand,” memory prices could stay stable or even rise, the analyst stated.
He explained that, as more people work remotely, servers will need more memory. On the other hand, Twigg hedged his bets, warning that “there’s risks that demand (for memory) could soften sharply. ”
I think it’s reasonable to believe that, as people stay at home much more often, they will use much more computer memory. After all, two of the biggest at-home activities now are internet surfing and streaming TV through the internet. Both use a great deal of data. As a result, Micron is indeed likely to benefit from the stay-at-home trend.
AI Should Boost Micron’s
Another trend that should lift MU stock is the strong demand for artificial intelligence. I’ve written multiple times in the past, the use of AI by datacenters is accelerating tremendously.
In my previous column on Micron, for example, I noted that “research firm Tractica expects annual spending on AI to expand at a compound annual growth rate of 43% between 2018 and 2023, generating revenue of $126 billion by 2025.” I also pointed out that DRAM is “typically used in conjunction with artificial intelligence.”
For a company with a great deal of exposure to the very strong trends of datacenters and AI, Micron’s valuation is quite reasonable. The company’s forward price-earnings ratio, based on analysts’ average estimate is 22. The P/E ratios of other companies with exposure to those trends are much higher. For example, the forward P/E ratios of Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) are 35.5 and 42, respectively.
The Bottom Line on MU Stock
Based on the progression of the coronavirus from China in other countries and the fact that the virus’ spread appears to be very slow in warm places, I expect the virus’ advance to slow down next in much of the U.S. next month. Consequently, I do not expect the macroeconomic downturn or the slowdown of demand for computer chips to last very long.
Meanwhile, I think higher consumption of online products by consumers should at least prevent Micron’s first-quarter revenue from dropping year-over-year. Given all of these points, along with the company’s high exposure to AI and data centers and the stock’s reasonable valuation, I believe that longer-term investors should buy the stock at its current levels.
As of this writing, Larry Ramer owned MU stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.