Micron (MU:NASDAQ) shares dial back negative sentiment as shares surge 10% on positive outlook

Stock indexes rallied sharply on Tuesday, snapping back from a three-day losing streak, buoyed by Micron Technology (MU:NASDAQ) . The quarterly results from the chipmaker played a pivotal role in changing market sentiment after fears of Omicron and rising inflation continued to weigh down on markets.

Micron, which makes memory chips that are used in data centers, PCs, smartphones, and vehicles, reported better-than-expected quarterly revenue and earnings after Monday’s close. Micron’s revenue rose 33% on an annualized basis to about $7.7 billion, coming in slightly ahead of the company’s prior projection. Earnings increased by 161% within the same period.

The bigger upside surprise for investors was the company’s forecast for $7.5 billion in revenue for the quarter ending in February. The forecast is 3% ahead of Wall Street’s target for a period in which many analysts feared the chipmaker would still be constrained by component shortages and weakness in memory pricing.

Yet several analysts had been predicting a shortfall, and the market has been dim on Micron anyway given the cyclical nature of the memory business. Micron’s share price had fallen nearly 16% over the past six months before Tuesday’s report—making it one of the weakest performers in the chip market.

It appears that Micron is back in the good books of Wall Street as it appears that investors are reconsidering their valuations of the stock. Tuesday’s rally comes as a relief to the chipmaker that has largely been sidelined from the strong gains made by other chip peers. Prior to Monday’s earnings report, Micron’s shares were up just 9% for the year. This is a far cry from the 35% gain for the PHLX Semiconductor Index.

Even more strikingly, Micron is the cheapest stock in the index, currently valued around nine times forward earnings compared with the peer average of 24 times. That 62% gap is nearly double the average discount Micron has fetched to the peer group over the past five years.

Micron is an exemplification of the value to growth story. As memory demand continues to become more critical to energy, data centers, and automotive industries, micron would play a more dominant role in the market. Micron is a major manufacturer of DRAM chips whose demand has been on the rise in recent years. DRAM chips make up over 30% of global chip demand, upwards from 20% of 5 years ago. If the trend continues, Micron is expected to outperform its peers.

This outlook is being bolstered by Micron’s leverage on data centers which is critical to the toll out of 5g as more mobile companies increasingly adopt the wireless technology, and the demand for infrastructure continues to increase. The company’s management has shown how resilient the company is in the face of declining PC DRAM prices through gross margins, inventory, and accurate end-market outlook.

The positive sentiment on the stock spilled over to other chip sticks such as Nvidia (NVDA:NASDAQ), Advanced Micro Devices (AMD:NASDAQ) , and Marvell Technology (MRVL:NAADAQ). Even companies exposed to cloud technology were not left out of the bull party. Google (GOOG:NASDAQ), Amazon (AMZN:NASDAQ), IBM (IBM:NYSE), and Microsoft (MSFT:NASDAQ) all finished in the green zone on Tuesday.

Though the proposed hikes by the Federal Reserve may put a wet blanket on sizzling hot tech stocks, it appears that there may be some elbow room for chip stocks to continue their bullish momentum. Though the pace is not expected to replicate this year’s momentum, the increasing digitization and dependency on technology mean that chip stocks would be able to at least maintain their margins, if not increase them.

This partly explains why most of Wall Street is positive on Micron, with about 85% of analysts rating the stock as a buy. At about 8 times forward earnings, the shares are cheap relative to peers which makes it a tempting choice for value hunters.