Buy Micron Technologies After Solid Q3 Earnings

Jun.25.14 | About: Micron Technology (MU)

Summary

Micron reported solid earnings, which prove that it can consistently grow above and beyond expectations.

Micron has significant network effect and scale advantages, which will ensure its spectacular growth story remains intact.

Micron trades at the valuation of a distressed value stock even though it is a high-quality growth name.

Micron Technologies (NASDAQ:MU) just released Q3 FY14 earnings. The company reported earnings, which beat the consensus by $0.07 per share, and revenues, which were $99 million above consensus. This is proof that the company is growing unbelievably fast and is an excellent stock to buy, especially at current valuations.

Revenues were still 72% higher than Q3 FY13. This is outstanding top-line growth, especially for an already-profitable company with a $33 billion market cap. Even better, EPS increased 24-fold over the same time period. Although earnings fell slightly from the previous quarter, this has happened before and is not indicative of the longer-term trend. I expect earnings and revenues to continue to grow rapidly, to the tune of at least 20%+ annual growth. The company also generates commendable free cash flow and has excellent profit margins.

Now there are other companies, which are growing very rapidly just like Micron, but they do not have the competitive advantages and compelling valuation, which Micron possesses.

Micron possesses some interesting competitive advantages, which will ensure it achieves excellent top and bottom line growth over the years to come. Micron was named one of Thomson Reuters 100 Top Global Innovators in both 2012 and 2013. The company is an industry leader in memory products, including DRAM, SDRAM, Flash Memory, etc. It is one of the top 5 semiconductor companies in the world. These facts give Micron both scale advantages and network effect advantages. Due to its scale, Micron is able to negotiate prices and achieve economies of scale in its product niches that other competitors cannot match. Also, electronics manufacturers are unlikely to switch to other chip manufacturers due to the product specifications and performance requirements, which are met by Micron. The costs of switching are high, giving Micron a significant network effect "economic moat." The company's return on equity (ROE) of 33.65% is just another sign of its large moat. This economic moat, which many other companies lack in the cutthroat electronics industry, should give Micron significant scale and pricing power in the years to come, leading to superior growth.

Micron also has a compelling valuation, which makes it a compelling buy. The stock trades at a 12.9 TTM P/E ratio. If P/E remained constant over the next five years, (which is a very reasonable assumption considering the company's growth) and EPS grew 20% annually, the stock price would be expected to multiply by approximately 2.5 times (about $81 per share). Micron Technologies is an extremely high-growth stock with formidable competitive advantages trading at the valuation of a beaten-down value stock.

Based on these factors, I would advise readers to consider this high-growth, high-quality stock, which is very likely to outperform over the next few years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.