My previous article on Micron Technology, Inc. (MU) predicted another rally, and I'm happy to report that I was correct in my assessment. The stock market is indeed giving MU an encore upside run, and I'm again confident that MU will hit a new 52-week high before this year-end.
Micron's shares are already up 22.52% over a month-long period (Nov. 6 - Dec. 5). This second rally is not yet over, MU can beat still beat its $22.09 52-week high due to several major tailwinds. Several positive factors are behind large investors' decision to make recent large purchases of MU stock. I expect more hedge fund managers will follow the steps of Ray Dalio and David Einhorn.
Einhorn's recent disclosure that his Greenlight Capital has invested around $402 million in Micron is a big vote of confidence. The said investment is equal to 2% ownership of the memory chip maker. This development is very bullish because Einhorn had rapidly acquired MU shares at recent high price levels.
Greenlight Capital probably bought more than 23.02 million shares of MU between October 1 and November 21, 2013. The fund did not disclose any MU position on its last 13F filing for the quarter ended September 30. Einhorn confirmed his long position for Micron - a big bet for big gains when MU starts pumping out those expected profits starting next year.
Tailwinds That Keep MU Flying
MU's stellar performance this year is because of realistic tailwinds. Investors wouldn't have allowed Micron's stock to gain 241% since January on pure speculative plays alone. Einhorn's main explanation on why he made such a big investment in Micron reflects the common industry view - Micron is in a great position to massively benefit from the DRAM and NAND industry consolidation.
Micron's successful buy out of Elpida gave the industry significant stability. The memory business has previously been notorious for its boom and bust cycle. Now that Elpida is under Micron, there are only three major players left. Benign oligopoly is always good for companies and investors alike.
SK Hynix Inc. won't be able to replace its lost capacity for the next few months so DRAM prices will remain high. Micron's DRAM unit will benefit from this for a few more months and this fact should be reason enough for MU to go higher than $22.5 before December ends.
The Elpida acquisition gave Micron double production capacity. It can easily meet any big spike in global memory requirements. While Samsung is still the number one memory producer, 25% of its production is used in house. Micron, therefore, benefits from higher market demand because it sells all its chips.
The NAND flash business is also on a rosy uphill trend. Analysts are predicting a solid 8.7% compounded annual growth until 2016. Micron's is a strong bet to dominate the NAND flash market because of its superior K Planar Cell NAND design. Not only does it performs better but is also easier to manufacture.
Micron's new Rexchip facilities in Taiwan can easily produce 500,000 wafers to augment Micron Singapore's 500,000 wafer capacity. Micron is capable of meeting any surge in RAM or NAND demand.
Elpida, despite now being under Micron, still remains as a favored memory supplier for Apple products. The fanatic loyalists will keep on buying iPhones and iPads for the next decade. Should Apple decide to lower its products' price tags, Micron will benefit more from the predicted increase in cheaper iOS products.
SSD is another Promising Tailwind
Micron's purchase of Elpida also gives it access to Rexchip's superb compact solid state drive technology. Based on analysts' estimates, the market of SSD will be half of the HDD industry after 2016. This rapid global shift to solid state drive is a golden opportunity for Micron.
Rexchip can try to manufacture solid state drives that are more cost-efficient to accelerate its entry to the SSD market. The projected 2016 revenue from SSD sales is $20.7 billion. Micron ought not to miss the boat on this product. It has the technology and the facilities to quickly produce competitively priced SSD models.
MU has a good chance to achieve a new 52-week high. As long as no serious headwind props up unexpectedly, I don't see why Micron should not reach the $23 level this December. Some investment whiz is already calling for a $30 target price for MU. Needham & Co.'s Rajvindra Gill doesn't believe that MU has reached its peak. I agree with him. It's a good time to buy a few more MU shares.