Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Micron Technology fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Micron's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Micron's key statistics:


MU Total Return Price Chart

MU Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

12.4%

Fail

Improving profit margin

(148.1%)

Fail

Free cash flow growth > Net income growth

(88%) vs. (154%)

Pass

Improving EPS

(151.4%)

Fail

Stock growth (+ 15%) < EPS growth

71.8% vs. (151.4%)

Fail

Source: YCharts. * Period begins at end of Q2 (May) 2010.

MU Return on Equity Chart

MU Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(140.5%)

Fail

Declining debt to equity

60.3%

Fail

Source: YCharts. * Period begins at end of Q2 (May) 2010.

How we got here and where we're going
Things don't look quite so favorable for Micron today. The memory-chip manufacturer musters only one out of seven possible passing grades, and even that single pass was more a technicality than a real improvement. High operational costs, and tepid revenue growth since 2010, have shriveled Micron's net margins, which fell into negative territory some quarters ago. Despite this apparent weakness, Micron's shares have marked a solid comeback over the past three years, in stark contrast to the story its fundamentals can tell. Can this growth be sustainable, or will Micron's weaknesses catch up to it in the end? Let's dig a little deeper to find out.

My fellow Fool Adrian Campos notes that a sharp transition from DRAM to NAND flash memories, along with an extensive price war, has impeded the progress of most dedicated memory-chip makers. According to IC insights, the NAND chip market is now worth $30 billion, although DRAM is still crucial to the PC market. However, weakening PC demand, and slowing smartphone sales, could cripple Micron's long-term revenue and net income growth prospects.

Micron recently completed the acquisition of Japanese memory-maker Elpida, for a "bargain-basement" purchase price of $2.5 billion, which will enable Micron to expand its manufacturing and sales presence in international markets. There's a reason why the price was so cheap: Elpida filed for bankruptcy in 2012 after the price of DDR3 2-gigabit DRAM declined by almost 85%. Micron also announced plans to scut more than 1,000 jobs in an attempt to reduce its operational expenses. My Foolish colleague Selena Maranjian notes that the acquisition of Elpida might provide some lucrative opportunities to expand its memory-chip supply relationship with Apple .

Hedge fund Bridgewater Associates also increased its stake in Micron after the Elpida acquisition, on the expectation of renewed strength in memory-chip prices. However, high-debt levels, fierce competition, and the industry's normal cyclicality may present a threat to Micron's long-term growth prospects. Samsung is already blowing major headwinds in Micron's direction in the smartphone arena, as its longtime frenemy Apple continues to purchase logic processors and memory chips worth more than $10 billion from the South Korean giant each year.

Putting the pieces together
Today, Micron has few of the qualities that make up a great stock; but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Want to get in on the smartphone phenomenon? Truth be told, one company sits at the crossroads of smartphone technology as we know it. It's not your typical household name, either. In fact, you've probably never even heard of it! But it stands to reap massive profits NO MATTER WHO ultimately wins the smartphone war. To find out what it is, click here to access the "One Stock You Must Buy Before the iPhone-Android War Escalates Any Further..."

The article Is Micron Technology Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Goal Setting

Want to succeed? Then you need goals!

View Course »

Asset Allocation

Learn the most important step in structuring an investment portfolio.

View Course »

Add a Comment

*0 / 3000 Character Maximum