Micron: An Apple Derivative Play

 |  Includes: AAPL, AVGO, INTC, MRVL, MU, NVDA, VZ
by: David Alton Clark

By David Alton Clark

Micron Technology, Inc. (NASDAQ:MU) is a manufacturer and marketer of semiconductor devices, principally dynamic random access memory (DRAM), Nandi Flash memory (NAND), Flash and NOR Flash memory, as well as other innovative memory technologies, packaging solutions and semiconductor systems for use in leading-edge computing, consumer, networking and embedded and mobile products. In addition, the Company manufactures semiconductor components for complementary metal-oxide semiconductor (CMOS) image sensors and other semiconductor products. Micron is a major supplier for Apple (NASDAQ:AAPL) products.
Apple News
On March 2, 2011, Steve Jobs introduced Apple's iPad 2. Despite a medical leave starting in January, Jobs stated he " just couldn't stay away from the unveiling of the iPad 2." Apple's iPad2 features an entirely new design that is 33 percent thinner and up to 15 percent lighter than the original iPad while maintaining the same 9.7-inch LED-backlit LCD screen and up to 10 hours of battery life. iPad 2 also features Apple’s new dual-core A5 processor for blazing-fast performance and stunning graphics and now includes two cameras — a front-facing VGA camera for Face Time and Photo Booth and a rear-facing camera that captures 720p HD video. iPad 2 is available in black or white, features models that run on AT&T’s (NYSE:T) and Verizon’s (NYSE:VZ) 3G networks, and introduces the innovative iPad 2 Smart Cover in a range of colors. iPad 2 will be available on March 11 in the US through the Apple Online Store, Apple Retail Stores, and select Apple Authorized Resellers.
Apple’s stock rose over 2 per cent immediately after Jobs began speaking. The pricing will be identical to the 2010 iPad at its introduction, ranging from $499 to $829 in six models. Apple has made the most of a head start in tablets, selling 15m units last year, which was 85 per cent of the market. AAPL dropped prices on the older iPad on Wednesday by $100. Forrester predicted that Apple’s fresher tablet would garner 80 per cent of the US market this year. If Apple executes, this bodes well for Apple's suppliers such as Micron. History is on Apple's side.
Micron's Current Growth Rate and Price to Earnings Ratio
MU's PE ratio is among the lowest of any stock in the semiconductors industry at 6.2. Compare this with the PEs of others: Intel (NASDAQ:INTC) 10.6, NVIDIA (NASDAQ:NVDA) 51.8, Marvell Tech (NASDAQ:MRVL) 13.7, and Broadcom (BRCM) at 20.4 to name a few. Additionally, during the past year, earnings growth has outpaced MU's historical five year growth rate. Micron's GPE (Growth to PE Ratio) is another popular measure of stock valuation. GPE compares earnings growth rate to PE ratio. MU has a GPE rating of 3.28. A stock is commonly considered to be undervalued when GPE is greater than 1.00 and overvalued when GPE is below 1.00. MU may be considered to be highly undervalued with a GPE of 3.28. Based on my analysis, I believe MU would be fairly valued at a share price of approximately $16.00. This is a 44% premium to the current share price of $11.09.
Recent Semiconductor Sector News and Analyst Comments
Semiconductor shares were mostly higher Wednesday after a J.P. Morgan analyst upgraded the chip sector, stating that an inventory correction is ending and “our bearish view on the economy has been wrong. We are upgrading our stance on the semiconductor sector from cautious to constructive due to the end of most of the inventory correction in the semiconductor market and a change in our belief that an economic downturn is going to happen in the near future,” analyst Christopher Danely stated.
“While we continue to believe this is likely at some point in the future due to unsustainable debt, we also view it as unlikely to happen for at least the rest of the calendar year,” said Danely . Additionally, He stated that the inventory correction many analysts warned about “appears to be mostly over as demand from several end markets appears to be improving.”
Christian Gregor Dieseldorff, an analyst at Semiconductor Equipment and Materials International (NASDAQ:SEMI) stated."2011 spending will finally exceed the peak year's 2007 fab spending of $46.4 billion. Spending on chip-making projects could grow by 22 percent globally this year, while spending on chip equipment production will grow by 28 percent."
Scott Sutherland, Wedbush stated " We expect the iPad 2 to continue to drive demand for NAND benefiting NAND suppliers like Micron Technology. We believe the iPad 2 will continue to drive NAND demand supporting our expectations that NAND supply/demand will be in balance in 2011."
And last but definitely not least, my favorite stock Guru, Jim Cramer, of CNBC’s Mad Money selected Micron as his “Favorite Bounce Back Chip Stock.” Cramer stated on an edition of CNBC's Stop Trading, “If you like Apple and a low-spec tech that hasn't moved very much look at Micron Technology. MU has prices stabilizing and Flash that's going into Apple products.” Cramer also stated "he likes the fact that MU was lagging in performance for the most of last year." I will let these analyst comments speak for themselves.
Based on Apple’s entry of the new iPad2, the possibility of another product release by Apple this year (purely speculative), and the expansion of the iPhone product into Verizon’s (VZ) platform & Samsung's Windows Phone 7 coupled with the remarks of many notable analysts regarding positive developments in the Semiconductor Sector and Micron being undervalued by nearly 50%, I feel confident endorsing a buy on this stock with a one year price target of $16.00. Micron is still down 7.5% since hitting nearly $12.00 just days ago prior to the Middle East unrest. Regarding the Middle East Oil Crisis, I tend to agree with Warren Buffett who stated on CNBC's Squawk Box on March 2, "it will be a non issue for American stocks." So I say, go ahead and buy a piece of Apple's pie, the price is right and I surely couldn't resist!

Disclosure: I am long MU.

Additional disclosure: These are my personal opinions regarding the stocks. Detailed company information was gathered from respective company websites.