Does Micron Technology Make Sense At The Current Price?

| About: Micron Technology (MU)


Micron Technology has been receiving a lot of attention in the market recently.

The company's share price seems to be supported by strong fundamentals.

Investors are paying very little for the company's cash flow compared to historical standards.

Micron could increase its margins helped by price hikes and new synergies (through the Elpida acquisition) and provide a lot of value to shareholders.

Micron Technology (NASDAQ:MU) is one of the hottest stocks in the market today. Many people seem to talk about this stock all over the internet and many analysts really like the odds of it being a successful investment. This is the first time since the technology bubble of the early 2000s that this stock is hot and this time it is actually based on strong fundamentals too, which means it is rather sustainable this time.

If we look at the historical trends in the company's revenues, we see a huge uptick in the recent years. Micron Technology is growing its revenues at such a rapid pace that this makes a lot of people nervous. The company has been hugely successful recently and there is little evidence to suggest that things will be changing anytime soon.

If we look at the company's price to revenue history, apart from the bubble of early 2000s, the investors have been paying 1 to 3 times Micron's revenues in order to acquire shares of the company. At the bottom, MU's price to sales ratio was well below 3 and the current figure of 2.31 is closer to the high-end of the range than the low-end of the range. By itself, this may be worrisome but this may also tell us that the investors are very hopeful about the future prospects of the company. There is absolutely nothing wrong with that as long as those hopes are backed by strong fundamentals.

How about the company's profitability? First, we will look at the company's gross margins. While Micron's gross margins are nowhere near where they were in 1990s or very early part of 2000, they still look strong compared to the post-recession period. At one point during the last recession, the company's gross margin was as low as -12% but they have been recovering since then. Currently the trend is upwards, and while the short term goal is to pass 30% in this metric, the long term goal will be closer to 40% in an effort to approach historically high margins.

When we look at the company's operating and net profit margins, we also see recovering trends since the last recession. Currently, the company enjoys an operating margin of 13.34% and a profit margin of 21.34% and both values are either at or near the top since the last recession. During the recession, the company's survival was in question when it was "enjoying" operating margins as low as -37%.

So, how much are investors willing to pay for Micron's profits? Well, this metric looks a little tricky. Since Micron hasn't been consistently profitable for the last decade, there are some large gaps in the company's P/E history. When Micron has been profitable, the investors were usually ready to pay about 15 times its net profits whereas the company currently trades for 11 times its net profits.

Since the chart above is somewhat inconclusive, we will also take a look at cash-flow from operations because this tends to be a more consistent metric for many companies, especially if we are looking at long term trends and the company hasn't been consistently profitable. The chart below paints a pretty picture. The blue line shows us that MU has been able to grow its cash-flow from operations greatly over the years and the orange line tells us that investors are paying only 7 times this figure for the company at the moment. Historically speaking, Micron's current cash flow comes at a very cheap price for the investors.

Looking towards the future, the analysts are expecting the company to earn $3.03, $3.09 and $3.39 in the next 3 years. This means we are looking for forward P/E ratios of 8.82, 8.65 and 7.88 for the next 3 years. This looks very attractive for a company that is still growing as we speak. These are valuations we would expect from blue chip companies with very limited growth potential.

The Elpida acquisition has been one of the main drivers of revenue growth for Micron and it will continue to be so in the medium-to-long term. While the PC industry will continue to be full of uncertainty for the foreseeable future, the mobile market will continue to be profitable for the company. In this space, the competition is intensifying but there is definitely room for more than one company to grow in this particular industry. Micron will be able to hold pricing power on DRAMs for a while as there is a lot of unmet demand in the mobile market even with increased competition.

As the synergies of the Elpida acquisition come in full play, Micron should see its margins expand a little bit more. This will also be supported by possible price hikes by the company in products where the demand is hot.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.