Returns as of 01/05/2022
Returns as of 01/05/2022
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Micron Technology (NASDAQ:MU) stock is carrying impressive momentum into 2022, thanks to the memory specialist’s outstanding fiscal 2022 first-quarter results, released on Dec. 20.
The chipmaker reported robust top- and bottom-line growth, while its second-quarter guidance was also better than what Wall Street was looking for. This led to a surge in Micron’s stock following its quarterly report, as the company indicated that there’s a healthy demand for memory chips from several verticals, and vanquished any concerns about a memory supply glut.
The health of the memory market will be a major green flag for Micron in 2022. Let’s see why.
Image source: Getty Images.
Micron expects DRAM (dynamic random-access memory) bit demand to increase in the mid- to high teens next year. Meanwhile, NAND (short for “not and”) flash memory demand is expected to accelerate 30% in 2022. Micron anticipates the long-term bit demand for DRAM and NAND flash memory to increase at a pace that would be identical to 2022.
Micron is counting on robust memory demand to help it deliver record revenue and solid profitability in the current fiscal year. The company points out that memory demand remains strong across all its end markets. For instance, in personal computers (PCs) and graphics, Micron believes that inventory adjustments at most customers are already done. As a result, Micron sees stable demand for memory chips from the PC market in 2022.
Micron management anticipates PC sales in 2022 to remain consistent with 2021 levels and adds that more PCs are now using low-power DRAM. More specifically, low-power DRAM accounts for 20% of the PC industry’s DRAM bit demand at present, and that number is expected to head higher in 2022 and beyond.
On the other hand, more and more PCs are now turning to solid-state drives (SSDs) for faster storage. Around 100 million SSDs were shipped in the first quarter of 2021 as compared to 64 million hard-disk drives (HDDs). Technavio estimates that global SSD sales will continue to increase in the long run, clocking an annual growth rate of 23.6% through 2025. Given that Micron’s latest generation of client SSDs have been qualified for use by several PC original equipment manufacturers (OEMs) and are already in volume production, it looks well-placed to capitalize on growing SSD demand.
Given that 5G smartphones are using 50% more DRAM and double the NAND flash content as compared to 4G smartphones, and their shipments are expected to increase 40% in 2022, it’s easy to see why Micron expects a healthy demand environment to prevail in 2022. Additionally, the increasing adoption of SSDs in data centers is another tailwind for the memory market. Micron’s data center revenue was up 70% year over year in the fiscal first quarter, and the company sees further growth in this segment as data centers deploy more SSDs instead of hard-disk drives.
So, rising memory demand will be Micron’s biggest growth driver in 2022. However, there’s one red flag that investors should keep an eye on, as it could derail Micron’s terrific rally.
While strong memory demand could be a green flag for Micron in 2022, industry watchers are wary that oversupply could send the market into a tailspin in the second half of the year. Gartner is one of the research companies anticipating a memory oversupply in the second half of 2022, thanks to higher supply and weakening demand, which would eventually lead to a reduction in memory prices.
Meanwhile, memory market researcher TrendForce estimates that capacity expansion by memory suppliers could lead to a 17.9% increase in DRAM bit supply in 2022. What’s alarming is that DRAM demand is expected to increase 16.3%, according to TrendForce’s estimates, and send the memory market from a state of shortage to one of surplus.
As a result, TrendForce forecasts that the price of DRAM could drop by between 15% and 20% in 2022. The DRAM industry could generate overall revenue of $90 billion in 2022, which would be identical to 2021 levels, as the potential drop in price could erase any gains arising out of an increase in shipments. This could be bad news for Micron, because 73% of its total revenue in the first quarter of fiscal 2022 came from selling DRAM chips.
This is a major red flag that Micron investors should keep an eye out for, as weak memory prices have historically wrecked the chipmaker’s top and bottom lines. So, even though this high-flying growth stock is carrying impressive momentum into the new year, it would be a good idea to look out for any potential signs of weakness in memory prices.
Discounted offers are only available to new members. Stock Advisor will renew at the then current list price. Stock Advisor list price is $199 per year.
Stock Advisor launched in February of 2002. Returns as of 01/05/2022.
Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
Making the world smarter, happier, and richer.
Market data powered by Xignite.