This Tech Stock Poised To Move Higher
Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Micron Technology (NASDAQ: MU) continues to fly. What's more is there could be even more upside to the stock in the coming months. The stock is already up over 40% year to date, but its pending acquisition of Elpida could send the stock even higher.
The approval to acquire the assets of bankrupt Elpida is one of Micron's biggest short-term catalyst that could push the stock higher. The addition of Elpida's assets will add 45% to Micron's total 300 million wafter capacity.
Micron would move into the second spot as the world's largest processor of silicon in the world, behind only Samsung. Elpida is the result of industry consolidation among Japanese memory manufacturers NEC, Mitsubishi and Hitachi.
Micron is a global manufacturer and marketer of semiconductor devices, namely NAND Flash, DRAM and NOR Flash memory. The company is already one of the largest memory makers, ranking among the top five suppliers in the world. Its products are used in an increasingly broad range of electronic devices, including personal computers, network servers, mobile phones, digital still cameras, MP3 players and other consumer electronics products.
The DRAM market has seen pressures due to increasing competition for PCs. The company, however, is turning to higher growth potential flash memory business, which will be driven by increases in the Ultrabook and solid state drive demand increases.
I see the attempt to diversify beyond DRAM as a long-term positive, as does the market. DRAM was previously Micron's majority of revenues, but as of 2012, memory revenues stacked up as follows: 46% from NAND flash sales, 38% from DRAM and 18% from other segments. The NAND market continues to show robust growth as new consumer electronics and handheld devices drive demand higher.
Micron had 31 hedge funds long in this stock at the end of 2012, an 11% from the previous quarter (check out all the hedge funds in love).
The semi-conductor market has had investor on a roller coaster type ride over the past few years due to end-market demand changes and price wars. The semi-conductor industry is chocked full of well know manufacturers, all offing investors their own respective growth stories, with all having different angles.
Applied Materials is one of the world's largest suppliers of equipment for the fabrication of semiconductor, flat panel liquid crystal displays (LCDs), and solar photovoltaic (PV) cells. Last quarter, Applied Materials saw a 44% increase in total orders from the prior quarter, on the back of a 84% rise in semiconductor orders.
Applied has some robust hedge fund interest, most notable from Sandy Nairn's Edinburgh Partners, who had the most valuable position in the company at the end of 2012, worth close to $187 million and comprising 10.6% of its total 13F portfolio (see how other hedge funds are trading Applied).
Analog Devices (NASDAQ: ADI) is the second largest producer of analog chips after Texas Instruments, with a strong position in high performance analog (HPA). Within this segment, Analog has a leading market position in converters, where it has around half the market share. However, the company has vast exposure to the industrial market, which accounted for 45% of 2012 revenues.
ARM Holdings (NASDAQ: ARMH) designs high performance RISC microprocessors and related technology and software, and sells development systems, to enhance the performance, cost-effectiveness and power-efficiency of an extensive range of embedded applications. ARM appears to be a bit expensive from a valuation perspective, trading with a price to earnings ratio that's a 470% premium to the S&P 500 P/E, while the 5-year average is closer to 310%.
Compared to Micron, ARM has a much less hedge fund interest, with only 16 hedge funds owning the stock at the end of 2012 compared to Micron's 31 (see how top-name hedge funds are trading ARM).
NVIDIA Corporation is a major chip maker for PCs, competing with the likes of Intel and AMD. Nvidia and these other companies have seen significant pressure due to a slowdown in the PC market. Nvidia's PC based graphics card has been under the most pressure, where the company gets closet 34% of revenues from GPU (desktops and notebooks).
By the numbers
Micron remains relatively cheap, trading at only 13 times forward earnings, while Applied Materials is also at 13 times, Analog 17 times ARM 27 times and Nvidia 15 times. Micron also has an impressive future expected growth, with analysts expected EPS to grow at an annualized 13% over the next five years, which is higher than any of the peers listed, expect ARM. ARM is expected to grow EPS at 22%, but its high valuation limits the attractiveness of this high expected growth.
Micron pays no dividend, unlike some of its major semi-conductor peers. Applied Materials pays a 3% dividend yield, Analog a 3% and Nvidia 2.4%. However, this is not necessarily a negative as the company is putting the cash saved from not paying a dividend to work.
Don't be fooled
Micron has one of the best growth profiles in the industry, couple this with its relatively cheap valuation and the stock can easily add to its already robust share price movement. The current consensus average price target on the company is over $11 and Sanford Bernstein also recently upped its price target on Micron to $13 per share, 40% upside from current levels.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!