Memory chips are an important element of semiconductor manufacturing. They’re a commodity, which means pricing is highly reliant on supply and demand, but also a proxy for the direction of the semiconductor industry overall since they’re used in the construction of more complex computing systems.
Micron Technology ( MU -1.11% ) is one of the leaders in this realm of the electronics world, and it reported an excellent Q2 fiscal 2022 (the three-month period ended March 3, 2022). Micron itself still looks like an undervalued stock amid a global chip shortage, and the global imbalance between limited chip supplies and rising demand indicates that this deficit will likely persist for some time still.
Industry is hungry for digital memory
Micron reported quarterly financials that handily beat its own guidance provided three months ago. Revenue was $7.79 billion (up 25% year-over-year) and adjusted earnings per share were $2.14 (up 118%). The company generated free cash flow of $1.03 billion in the period, and ended Q2 with $10.2 billion in cash and short-term investments and debt of $7.08 billion.
CEO Sanjay Mehrotra and the top team issued Q3 guidance that shows momentum is poised to continue. At the midpoint of expectations, revenue is expected to increase 17.5% year-over-year, and adjusted earnings per share are expected to increase 31%. Management sees memory chip pricing rising by a double-digit percentage for the remainder of the 2022 fiscal year compared to 2021.
There was one notable issue: Russia’s invasion of Ukraine. As pointed out by the Semiconductor Industry Association (SIA) back in February, the region is a key supplier of elemental gas (notably neon) used in manufacturing chips. Micron echoed the SIA’s comments, pointing out there is no immediate impact to supply as it has ample inventory on hand for the short term. However, while it is securing longer-term supply elsewhere, it does see some increased costs from making these purchases.
But another supply chain disruption aside, Micron is on pace for a record year of sales. Industries around the globe need more chips than ever before, so it looks like we’re still quite some time away from the chip shortage coming to an end.
A decade more of secular growth?
As to the specifics around what’s driving the need for more memory, the end markets are diverse. Mehrotra mentioned 5G mobile networks. New phones with 5G need significantly more memory as apps grow more complex and data-intensive. Data centers are another area of rapid expansion. GPUs (graphics processing units) like those developed by NVIDIA ( NVDA -5.88% ) and AMD ( AMD -2.95% ) need massive amounts of data in order to accelerate the computation of AI and cloud-based services. Micron is a top supplier here too.
Automotive and other industrial applications are expected to be the fastest-growing segments for Micron in the next decade. The auto industry and its migration to electric vehicles (EVs) in particular should be a massive secular growth trend that benefits the memory chipmaker. Mehrotra commented that some high-end EV models require about $750 worth of memory per vehicle, some 15-times more than the average internal combustion car. That’s not to say all EVs will need that much memory, but it illustrates the impending demand ahead. Tens of millions of vehicles are sold every year, and with many of them set to go electric over the course of the 2020s, Micron will find no shortage of new sales outlets.
This doesn’t change the fact that Micron is a manufacturer of a basic tech building block. As a result, the stock will remain a highly volatile play on the semiconductor industry over the next decade. However, there are secular growth trends at play that should keep financials rising over the long term. Trading for just under 10 times trailing 12-month adjusted earnings per share, Micron still looks like a buy to me.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning 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 richer.