Elevator Pitch
I assign a Bullish rating to Micron Technology, Inc. (NASDAQ:MU).
I see Micron stock as undervalued with a single-digit forward FY 2022 P/E, while its expected revenue growth and ROEs in the next two years are in the double-digit range. Micron's share price could possibly go up, once the market realizes that the worries about the semiconductor chip shortage are relatively overblown, and that the demand-supply situation for DRAM is balanced. Also, the supply-demand dynamics of the DRAM industry in the medium term are favorable, which bodes well for MU's growth prospects in the next five years. In five years' time, I think that the market will be willingly to assign a higher valuation multiple to Micron Technology, as the company's medium-term financial performance gradually reflects the favorable supply-demand dynamics of the DRAM market over time.
I think that MU stock is a good buy now, which explains my Bullish rating. The stock's valuations are appealing, and its future prospects look good considering the demand-supply dynamics for the DRAM market.
Company Description
In the company's media releases, Micron Technology calls itself "an industry leader in innovative memory and storage solutions" offering a "portfolio of high-performance DRAM, NAND and NOR memory and storage products." At the recent Barclays (BCS) Americas Select Franchise Virtual Conference held on May 19, 2021, MU claims to have the second highest and fourth highest revenue among semiconductor companies in the US and globally, respectively.
With respect to revenue mix by technology, Micron Technology earned 68% of the company's FY 2020 revenue from DRAM, while NAND and other technologies accounted for 29% and 3% of MU's sales last year, respectively. For the purpose of this article, I will be primarily focusing on Micron Technology's DRAM business, and this is justified by the fact that DRAM contributed the majority of the company's sales.
Is Micron Stock Overvalued?
Micron stock last traded at a share price of $75.94 at the close of July 23, 2021. This translates to consensus forward FY 2021 and FY 2022 normalized P/E multiples of 12.7 times and 6.5 times, respectively. MU also trades at a trailing P/B multiple of 2.0 times.
According to market consensus financial data obtained from S&P Capital IQ, Micron Technology's revenue is forecasted to grow by +29% and +34% in FY 2021 and FY 2022, respectively. Sell-side analysts also see MU delivering ROEs of 15% and 27% for the current fiscal year and the next fiscal year, respectively.
On an absolute basis, Micron Technology's forward P/E valuations are undemanding, especially since the stock's FY 2022 P/E is only in the single-digit range. Also, its forward P/E multiples are the lower end of the peer group, despite boasting relatively higher forward ROEs and faster forecasted revenue growth rates as compared to the majority of its peers.
Peer Valuation Comparison For Micron Technology
| Stock | Consensus Current Fiscal Year Normalized P/E Multiple | Consensus Forward One Fiscal Year Normalized P/E Multiple | Trailing P/B Multiple | Consensus Current Fiscal Year Revenue Growth Metric | Consensus Forward One Fiscal Year Revenue Growth Metric | Consensus Current Fiscal Year ROE Metric | Consensus Forward One Fiscal Year ROE Metric |
| Western Digital Corporation (WDC) | 16.5 | 7.2 | 1.96 | -1% | +22% | 12% | 27% |
| SK Hynix Inc.[000660:KS] | 8.6 | 5.8 | 1.55 | +31% | +28% | 17% | 22% |
| Samsung Electronics Co., Ltd. (OTCPK:SSNLF) (SSNNF) [005930:KS] | 13.6 | 10.9 | 1.96 | +14% | +11% | 14% | 15% |
Source: S&P Capital IQ
In the subsequent section of my article, I try to understand why Micron Technology trades at only a single-digit consensus forward FY 2022 P/E, and assess potential valuation re-rating factors.
Can Micron Stock Go Up?
Micron Technology's stock price performance in the first seven months of the current year has been lackluster. Year-to-date in 2021, MU's share price only rose by +1%. Micron Technology started off the year well, with its shares increasing by +29% from $74.05 as of January 4, 2021 to a year-to-date high of $95.59 as of April 12, 2021. But MU's stock price subsequently corrected by -21% in the next three months to close at $75.94 on July 23, 2021. Also, as highlighted in the preceding section, Micron Technology's valuations are pretty attractive.
I believe that Micron Technology's share price weakness in the past three months is largely attributable to concerns regarding the semiconductor chip shortage and its impact on MU. However, I think Micron's stock price could recover and go up in the near-term, when the market realizes that these concerns are overdone.
In a recent EETimes (electronics industry publication) article published on July 15, 2021, the CEO of VLSI Research (market research firm focused on the semiconductor space), Dan Hutcheson, was interviewed as saying that "beyond the automotive sector, chip shortages are pretty much over", and he noted that DRAM and NAND are areas which are "either tight or still in balance" now. In other words, it might be incorrect to view semiconductor chip shortage as a factor that affects all of the sub-segments of the semiconductor industry and every company equally.
Furthermore, Micron Technology takes the view that the current semiconductor shortage will not have a significant impact on the medium term demand for its products, and the company sees a similar industry shortage issue being avoidable in the future. At the company's 3Q FY 2021 earnings call on June 30, 2021, Micron Technology stressed that "as that semiconductor shortage gets alleviated over time, that actually is going to create more demand for memory and storage because every end application today" needs "memory and storage." MU also added at the recent quarterly results briefing that the current semiconductor chip shortage "drives a different mindset on how to avoid this kind of situation in the future", as more companies move from a "just-in-time" to a "just-in-case" inventory management policy.
Micron Technology is expected to report its 4Q and full-year FY 2021 financial results in late- or end-September 2021. A better-than-expected financial performance or a more favorable demand-supply outlook for the industry as per management guidance & comments could possibly be positive re-rating catalysts for the stock.
It is far more important to look beyond Micron Technology's near-term share price performance and the semiconductor chip shortage situation now, and focus on MU's prospects in the medium to long term which I tend to discuss about in the next section.
Where Will Micron Technology Stock Be In 5 Years?
Answering the question of "where will Micron Technology stock be in 5 years" is essentially making an assessment of the supply-demand dynamics of the DRAM industry in the medium term.
The DRAM industry is now really an oligopoly comprising just three major players. According to a May 23, 2021 Nikkei Asia article, Samsung Electronics, Micron Technology, and SK Hynix boast market shares of 41.7%, 29.4% and 23.5%, respectively in the global DRAM market. In other words, the other smaller players in aggregate only account for around 5% of the market.
In comparison, there were approximately 10 major players competing for market share in the DRAM market in the early 2000s. The DRAM market has consolidated significantly in the last decade, with Micron Technology's other competitors either being acquired or going out of business. An oligopolistic industry structure for the DRAM market supports the case for supply-side discipline. Notably, technology consulting firm Yole forecasts that "DRAM and NAND revenues are expected to grow with (CAGRs of) 15% and 8% respectively" between FY 2020 and FY 2026. Specifically, Yole highlights that the DRAM market growth will be driven by "a combination of capex (capital expenditures) cuts from suppliers in recent years and flourishing demand."
Micron Technology also emphasized at its recent quarterly results briefing in end-June 2021 that "capex in the industry has been on the DRAM side, extremely disciplined", and it disclosed that the company's "days of inventory are at 98, extremely low as well."
With regards to future demand for the DRAM industry, it is expected that memory content will be growing rapidly in the next five years across the various verticals as per the chart below.
The Estimated Increase In Memory Content For Various End-Markets Between 2020 And 2026
Source: Yole's Market and Technology Report 2021
The mobile end-market is the most significant source of revenue for Micron Technology, accounting for approximately a quarter of its top line in FY 2020, respectively. The client & graphics, enterprise & cloud server and SSDs & other storage end-markets each contributed a fifth of MU's FY 2020 revenue, respectively. Micron Technology generated the remaining 15% of its FY 2020 sales from the automotive, industrial, and consumer end-market.
Looking forward, Micron Technology is guiding for a decent "long-term DRAM bit demand growth CAGR of mid-to-high teens", and it has also committed to maintaining "long-term bit supply growth CAGR with the industry bit demand growth CAGR".
On top of favorable demand-supply dynamics in the DRAM market, it is noteworthy that Micron Technology has also been gaining market share from its major rival. In the same Nikkei Asia article referenced to above, it was also noted that Micron Technology's market share of the global DRAM industry expanded by +3 percentage points in the past three years, which was attributed to Samsung Electronics diverting more attention & resources to other businesses like smartphones & foundries, and the increase in MU's number of DRAM engineers following the acquisition of Japan's Elpida Memory.
In summary, I see Micron Technology benefiting from a significant positive valuation re-rating (P/E multiple expansion) in five years' time, as the market eventually appreciates the favorable supply-demand dynamics of the DRAM market and views MU as a key beneficiary.
Is MU Stock A Good Buy Now?
In my opinion, MU stock is a good buy now.
Micron Technology's share price has corrected significantly in the past few months, given the market's concerns about the current semiconductor chip shortage. In my opinion, this is a buying opportunity for investors with a long term horizon. MU's valuations are reasonably attractive on both an absolute and relative basis, and I view the DRAM industry's supply-demand dynamics as favorable in the medium term.
MU's key risks are a lower-than-expected rate of increase in memory content for key end-markets, and the failure of the major players in the DRAM industry to maintain supply-side discipline.
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