Micron Technology Inc. (NASDAQ:MU) has been the best performer of all S&P 500 companies in the last 52 weeks; its stock price has risen 148% in that period, while the S&P 500 index has risen 17.4%, and the Nasdaq Composite Index has risen 20.06%. Since the beginning of the year, Micron's stock price has already risen 23.4%. Nevertheless, in my opinion, MU stock still has plenty of room to move up because it has compelling valuation metrics and strong earnings growth prospects, and because of favorable market conditions for the DRAM and NAND memories for the long term.
Micron is the largest U.S. memory company and a leading global supplier of DRAM, NOR and NAND memory. The company provides memory solutions for computing, communications, consumer and industrial applications, and serves both wireless and embedded applications. Micron was founded in 1978 and is headquartered in Boise, Idaho.
According to Micron, the DRAM market is expected to grow in the 20%-30% range annually, and the NAND market is expected to grow in the 30%-40% range annually for the long term. These favorable market conditions will benefit Micron and should enable the company to continue to grow and to improve margins.
On April 24, SK Hynix, Inc. (OTC:HXSCL) on its earnings call said that it is not adding any new NAND Capacity - a big positive for SanDisk (SNDK) and also for MU as it moves to improve NAND margins. Furthermore, on the same day, KLA-Tencor (NASDAQ:KLAC), a test and inspection equipment supplier to the semiconductor market, on its earnings call, delivered more confirmation that the memory market supply was slowing down. KLAC said "momentum in 3D-NAND has cooled" since its last earnings in January 2014. More capped NAND supply into 2H14 with Hynix and slowing 3D-NAND would be a significant positive for MU and for SNDK. On April 22, Inotera revised up its 1Q14 results owing to above seasonal DRAM pricing, favorable mix to enterprise DRAM, and disciplined supply. Micron has a 35% ownership of Inotera, and it purchases all of Inotera's output based on a discount to current market prices.
In July 2013, Micron completed its acquisition of the Japanese DRAM manufacturer Elpida, which filed for bankruptcy in February 2012 for about $2.0 billion. Micron also acquired Powerchip's 24% stake in Rexchip for about $330 million, giving MU an 89% position in Rexchip after including Elpida's 65% interest. In my opinion, these acquisitions are extremely favorable for Micron since the deals increased MU's capacity by about 45%, increased its exposure in mobile, and gave it more manufacturing flexibility among different memory technologies.
The table below presents the valuation metrics of MU; the data were taken from Yahoo Finance and finviz.com.
Micron's valuation metrics are excellent; the trailing P/E is very low at 10.84, and the Enterprise Value/EBITDA ratio is exceptionally low at 7.67. According to Yahoo Finance, MU's next financial year forward P/E is very low at 8.83 and the average annual earnings growth estimates for the next 5 years is high at 10.25%; these give an extremely low PEG ratio of 0.86. Only Lam Research (NASDAQ:LRCX) and SNDK among S&P 500 tech stocks have a lower PEG ratio (see my recent articles about LRCX and SNDK). The PEG Ratio - price/earnings to growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
Latest Quarter Results
On April 03, Micron reported its second-quarter fiscal 2014 financial results, which beat EPS expectations by $0.09 (11.8%) and beat on revenues. Revenues in the second quarter of fiscal 2014 were $4.11 billion and were 2 percent higher compared to the first quarter of fiscal 2014, and 98 percent higher compared to the second quarter of fiscal 2013. On a non-GAAP basis, net income attributable to Micron shareholders in the second quarter of fiscal 2014 was $989 million, or $0.85 per diluted share, compared to net income of $881 million, or $0.77 per diluted share, in the first quarter of fiscal 2014.
Competitors and Group Comparison
According to Micron, it faces intense competition in the semiconductor memory market from a number of companies, including Samsung Electronics Co. Ltd. (OTC:SSNLF), SanDisk, Hynix, Spansion Inc. (CODE), and Toshiba Corporation (OTCPK:TOSBF).
A comparison of key fundamental data between Micron and its main competitors is shown in the table below.
Source: Yahoo Finance, finviz.com
All the three companies have exceptional fundamentals.
Micron's Growth Rates parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below.
Personally, I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decision making, including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.
The MU stock price is 7.88% above its 20-day simple moving average, 10.76% above its 50-day simple moving average and 32.10% above its 200-day simple moving average. That indicates a strong short-term, mid-term and long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -0.02 and ascending, which is a strong bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 67.52 approaching overbought conditions.
Analyst opinion is extremely divided among the thirty four analysts covering the stock; nine rate it as a strong buy, ten rate it as a buy, eleven rate it as a hold, two rate it as an underperform, and two analysts rate it as a sell.
TipRanks is a website that ranks analysts according to their performance. According to TipRanks, among the analysts covering MU stock, there are only fourteen analysts who have the four or five star rating, ten of them recommend the stock. On April 22, Needham & Company's analyst Rajvindra Gill reiterated a Buy rating and $40 price target on Micron Technology, saying Inotera's 1Q14 results bode well for the ongoing stability in the DRAM market. Gill commented:
"Early this morning, Inotera revised up its 1Q14 results owing to above seasonal DRAM pricing, favorable mix to enterprise DRAM, and disciplined supply. Recall that MU has a 35% ownership of Inotera, whereby MU purchases substantially all of Inotera's output based on a discount to current market prices. Net, Inotera's results substantiate our positive thesis on the DRAM market, namely: 1) favorable mix shift to higher margin DRAM products; 2) a moderation of long-term DRAM supply due to process node efficiencies; 3) stable-to-above seasonal ASPs and 4) fundamental shift in customer behavior to long-term agreements, rather than purchasing on spot market."
I consider Mr. Gill's analysis very valuable, since he has 5-Star rating from TipRanks for the accuracy of his previous calls.
As the largest U.S. memory company, Micron will benefit from favorable market conditions for the DRAM and NAND memories for the long term. Micron has compelling valuation metrics and strong earnings growth prospects; it has an extremely low PEG ratio of 0.86, only LRCX and SNDK among S&P 500 tech stocks have a lower PEG ratio. Furthermore, its two-year Sharpe ratio, which measures the reward-to-risk ratio, is very high at 2.32 while the S&P 500's two-year Sharpe ratio is at 0.995. All these factors bring me to the conclusion that MU stock is a buy right now.
Disclosure: I am long MU, LRCX, SNDK, KLAC. 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.