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How Micron Technology Stock Gained 27.5% In the First Half of 2018

What happened

Shares of Micron Technology (NASDAQ: MU) rose 27.5% in the first half of 2018, according to data from S&P Global Market Intelligence. Thanks to strong unit pricing trends in a commoditized industry that had formerly been prone to massive street-price drops, the memory chip maker's investors have enjoyed an 81% return over the last full year.

Three DDR4 computer memory modules, loosely stacked on a plain white table.
Three DDR4 computer memory modules, loosely stacked on a plain white table.

Image source: Getty Images.

So what

It's been three years since the last round of price wars in the memory industry, and Micron has enjoyed every second of this reprieve. a highly fragmented industry has been boiled down to a handful of major suppliers in the wake of many bankruptcies and heavy consolidation, and Micron is one of the winners. Trailing sales have doubled since bottoming out two years ago, negative cash flows have turned into $7.6 billion of annual cash creation, and Micron recently kicked off a shareholder-friendly $10 billion share buyback program.

Now what

The company can look back at a long string of the positive earnings and revenue surprises and even skeptics are starting to believe that these stable chip prices are the new normal.

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Micron's chart still looks jagged as its clients are facing fickle consumers, making it hard to predict what the demand for memory chips might be. The overall trend is still undeniably positive.

Despite these strong fundamentals and the increasingly convincing stability of memory prices, Micron's shares are still priced as if the sky's about to fall. You can pick up Micron shares at just 5.7 times trailing earnings and the same price to free cash flows ratio today. The stock would look cheap even at double these valuation ratios, leaving plenty of runway for continued gains in the months and years ahead.

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Anders Bylund owns shares of Micron Technology. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.