Micron Technology: An Absolute Buy At Current Market Levels

Apr. 28, 2022 7:41 AM ETMicron Technology, Inc. (MU)52 Comments22 Likes
Dalton Hicks profile picture
Dalton Hicks
1.39K Followers

Summary

  • Demand from DRAM and NAND remains strong; Micron still expects double-digit demand growth.
  • The auto industry market potential is massive with autonomy on the horizon; Micron holds roughly 50% of the auto market.
  • Micron is trading well below the valuation metrics of comparable industry peers, yet is producing better bottom-line results.

Electronic circuit board production and computer chip fly test by robotic automated machine

Aguus/E+ via Getty Images

Thesis

Micron Technology (NASDAQ:MU) is my number one stock recommendation as of now. The stock is down roughly 32% from highs seen in January and is likely one of the most undervalued stocks in the broader market. Bottom line growth has been impressive, demand for DRAM and NAND is strong, and the cyclical nature of semiconductors is seemingly fading. Here's why I'm buying shares of Micron like a kid in a candy shop.

Demand growth for DRAM and NAND is in the double-digits

As the tech industry continues its rapid growth, bit demand follows suit. From phones, PC's, data centers, vehicles, and gaming consoles, memory is one of the hottest commodities in the market. Micron provides the best products available in the market, from DDR5 and the 2400 NVMe SSD, the first 176-layer QLC NAND. Micron is expecting industry DRAM demand growth to be in the mid to high teens with approximately 30% demand growth for NAND in CY22. Micron is selling DRAM and NAND as fast as it produces it and expects production cost reductions in 1-alpha DRAM and its 176-layer NAND nodes. In short, DRAM and NAND demand is growing at double-digits and production costs are decreasing.

The evolving auto industry is great for Micron

The auto industry needs serious memory capabilities, especially with the likes of autonomous software. Micron currently supplies roughly 50% of the auto memory market, and according to TrendForce, the DRAM market in the auto industry is expected to grow at a CAGR of 30% through FY24. Estimate for the amount of memory autonomous vehicles will utilize vary quite a bit. Regardless of what it will be, the amount of memory required is going to be massive. According to data I've found estimates range from 0.3 terabytes per day to upwards of 32 terabytes per day. This means vehicles would need the memory capabilities to collect and store upwards of 32 terabytes of data per day before the data is transferred to the cloud. This is absolutely massive for Micron in two ways. First, the vehicles themselves will need significant memory capabilities to gather autonomous driving data. Considering Micron holds roughly 50% of the auto memory market its clear the potential here is incredible. Then, the memory will need to be stored in the cloud (data centers) to be used to continually improve the autonomous driving software. Micron's data center revenue grew over 60% on a year-over-year basis from FQ2. The development of autonomous driving software will provide an extremely lucrative opportunity for the likes of Micron. If you don't believe autonomous software will play out, two of the largest companies in the world-Tesla (TSLA) and Alphabet's (GOOG) Waymo-are developing it aggressively. Waymo has provided thousands of driverless rides in robo-taxis in Phoenix, and I think we are all familiar with Tesla's autopilot.

Micron is undervalued and an absolute buy at current market levels

Micron's bottom line growth has been impressive, beating numerous earnings estimates. Revenue for FY21 came in at $27.70 billion, up 29.19% from FY20. Free cash flow came in at $2.438 billion, up 2,837% from FY20. Earnings came in at $5.14 per share, up 117% from FY20. Micron's P/E ratio is roughly 8.4 and its P/FCF ratio is roughly 15.54. Both these ratios are lower than competitors such as Intel (INTC), Advanced Micro Devices (AMD), NVIDIA (NVDA), and Broadcom (AVGO). The average P/E ratio of the respective competitors is 30.4, and the average P/FCF ratio is 31.5. Based on comparable industry peers, Micron should be trading around $241.68 per share based on earnings, and $134.69 per share based on free cash flow. Let's look at Micron's competitors year-over-year earnings and free cash flow growth to show why Micron deserves to be trading within the same valuation metrics as they do.

  • AMD: FY21 EPS: $2.57, up 24.75% from FY20. FY21 Free Cash Flow Per Share: $2.62, up 307% from FY20.
  • INTC: FY21 EPS: $4.86, down 2.7% from FY20. FY21 Free Cash Flow Per Share: $2.362, down 52% from FY20.
  • NVDA: FY21 EPS: $3.85, up 122% from FY20. FY21 Free Cash Flow Per Share: $3.208, up 71.5% from FY20.
  • AVGO: FY21 EPS: $15.00, up 137% from FY20. FY21 Free Cash Flow Per Share: $31.05, up 12.7% from FY20.

Micron's bottom line growth has either outperformed or been right in line with all of its comparable competitors. Based on Micron's performance and industry peer valuations I firmly believe a fair market value for Micron would be around $188 per share. This is the median figure between earnings and free cash flow values derived from comparable competitor valuations.

Micron's balance sheet is also extremely strong. Let's look at cash on hand, retained earnings, shareholders equity, debt-to-equity, and current ratio.

  • Cash on hand: $10.12 billion as of 2Q22.
  • Retained earnings: $43.41 billion as of 2Q22.
  • Shareholder Equity: $47.84 billion as of 2Q22.
  • Debt-to-equity: 0.1271 as of 2Q22.
  • Current ratio: 3.108 as of 2Q22.

Micron's balance sheet raises no concerns at all. The company has plenty of cash on hand and far more equity than debt. Retained earnings and shareholder equity are fruitful and have been rising consistently. In fact, 2Q22 TTM retained earnings are up 25% from the same quarter last year and shareholder equity is up 17.66%. Current assets are valued 3:1 compared to current liabilities. The balance sheet looks great to me.

I would also like to address some other positive figures. Micron's FY21 cash from investing came in at ($10.59) billion, up 39.5% from FY20. Micron invested more in FY21 than any other year in the company's history. Micron's current weighted average cost of capital (WACC) sits at 8%, with its return on invested capital (ROIC) sitting at 18%. This shows Micron is generating double-digit returns on its invested capital, and Micron is investing heavily as seen by FY21's cash from investing figures. Cash from operations has followed suit nicely with FY21's figure coming in at $12.47 billion, up 50% from FY20.

Micron has produced impressive bottom-line growth and has a secure balance sheet. Micron is performing just as well and generally better than comparable competitors yet is trading well below their respective valuation metrics. These figures clearly show that Micron is undervalued and is a strong buy. I believe the company's intrinsic value would be in the $188 per share range, representing more than 100% upside from current market prices.

Seeking Alpha's quant rating, authors, and Wall Street analysts think Micron's a buy too

Below are the indications from Seeking Alpha's quant rating, Seeking Alpha authors, and Wall Street analysts.

Micron Technology Stock Quant Rating

Seeking Alpha Quant Rating on MU (seekingalpha.com/symbol/MU/ratings/quant-ratings)

Micron Stock analyst ratings

Seeking Alpha Author's Rating on MU (seekingalpha.com/symbol/MU/ratings/author-ratings)

MU stock Wall Street Analyst Rating

Seeking Alpha Wall Street Analyst's Rating on MU (seekingalpha.com/symbol/MU/ratings/sell-side-ratings)

Risks associated with an investment in Micron Technology

The semiconductor industry is cyclical in nature. This is a risk worth monitoring as I've seen reports and analysts stating that they believe chip shortages could soften in the second half of this year. However, there are other reports citing that shortages will persist well into next year. If demand for chips fall, we may see a peak in semiconductors sometime this summer. This would not fare well for Micron and its investors and is a risk worth monitoring. I believe the cyclical nature of chips is coming to an end. With everything beginning to run digitally and, on the cloud, I believe demand is going be consistently strong for the foreseeable future. Every new phone, gaming console, vehicle, and computer is coming with more and more memory. This is particularly favorable for Micron as the heart of its business lies in memory. Nevertheless, the cyclical nature of semiconductors is a risk worth noting and keeping an eye on.

Micron has cited that the procurement of certain raw materials could increase costs moving forward. No negative impacts are expected on near-term production, and it's not clear how significant the cost increases might be. Investors should monitor margins and cost of goods sold in upcoming reports to make sure bottom line isn't too adversely affected. There is no information regarding how much these increased costs may affect bottom line. I view this as a potential risk and it's worth monitoring.

While I believe demand for chips will remain strong, inflation could hurt demand. If consumer budgets get too tight, many chip-using devices might fall out of the budget. I will be keeping an eye on revenue and company updates to gauge demand strength.

Conclusion

In conclusion, I believe Micron Technology is an absolute buy for almost any portfolio. The macro-outlook for the company is promising, demand is still strong, and bottom-line growth has been impressive. Micron is trading well below the valuation metrics of comparable industry competitors while simultaneously producing better bottom-line results. I find the risks associated with Micron to either be temporary or short-term. As a long-term investor these don't bother me. I highly recommend shares of Micron Technology and believe the company's intrinsic value is more than double its current market levels.

This article was written by

Dalton Hicks profile picture
1.39K Followers
My investment analysis is focused on identifying well-established companies trading appreciably under intrinsic value. I believe in deep value, long-term investments. My objective is to generate exceptional returns from well-known, less volatile blue chips. I am a mortgage loan officer, and the head of a limited investment partnership. I hope my contributions and analysis can provide valuable insight to fellow investors.
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Disclosure: I/we have a beneficial long position in the shares of MU either through stock ownership, options, or other derivatives. 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.

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