Micron Technology Stock: Absolute Buy At Current Market Levels

Thesis

Micron Expertise (NASDAQ:MU) is my primary inventory suggestion as of now. The inventory is down roughly 32% from highs seen in January and is probably going one of the crucial undervalued shares within the broader market. Backside line progress has been spectacular, demand for DRAM and NAND is powerful, and the cyclical nature of semiconductors is seemingly fading. This is why I am shopping for shares of Micron like a child in a sweet store.

Demand progress for DRAM and NAND is within the double-digits

Because the tech business continues its speedy progress, bit demand follows go well with. From telephones, PC’s, knowledge facilities, automobiles, and gaming consoles, reminiscence is among the hottest commodities available in the market. Micron offers the most effective merchandise out there available in the market, from DDR5 and the 2400 NVMe SSD, the primary 176-layer QLC NAND. Micron is anticipating business DRAM demand progress to be within the mid to excessive teenagers with roughly 30% demand progress for NAND in CY22. Micron is promoting DRAM and NAND as quick because it produces it and expects manufacturing price reductions in 1-alpha DRAM and its 176-layer NAND nodes. In brief, DRAM and NAND demand is rising at double-digits and manufacturing prices are lowering.

The evolving auto business is nice for Micron

The auto business wants critical reminiscence capabilities, particularly with the likes of autonomous software program. Micron presently provides roughly 50% of the auto reminiscence market, and based on TrendForce, the DRAM market within the auto business is predicted to develop at a CAGR of 30% by way of FY24. Estimate for the quantity of reminiscence autonomous automobiles will make the most of differ fairly a bit. No matter what it will likely be, the quantity of reminiscence required goes to be huge. Based on knowledge I’ve discovered estimates vary from 0.3 terabytes per day to upwards of 32 terabytes per day. This implies automobiles would wish the reminiscence capabilities to gather and retailer upwards of 32 terabytes of information per day earlier than the information is transferred to the cloud. That is completely huge for Micron in two methods. First, the automobiles themselves will want vital reminiscence capabilities to collect autonomous driving knowledge. Contemplating Micron holds roughly 50% of the auto reminiscence market its clear the potential right here is unimaginable. Then, the reminiscence will must be saved within the cloud (knowledge facilities) for use to repeatedly enhance the autonomous driving software program. Micron’s knowledge middle income grew over 60% on a year-over-year foundation from FQ2. The event of autonomous driving software program will present a particularly profitable alternative for the likes of Micron. In the event you do not imagine autonomous software program will play out, two of the most important corporations within the world-Tesla (TSLA) and Alphabet’s (GOOG) Waymo-are creating it aggressively. Waymo has supplied 1000’s of driverless rides in robo-taxis in Phoenix, and I believe we’re all accustomed to Tesla’s autopilot.

Micron is undervalued and an absolute purchase at present market ranges

Micron’s backside line progress has been spectacular, beating quite a few earnings estimates. Income for FY21 got here in at $27.70 billion, up 29.19% from FY20. Free money stream got here in at $2.438 billion, up 2,837% from FY20. Earnings got here 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. Each these ratios are decrease than rivals equivalent to Intel (INTC), Superior Micro Units (AMD), NVIDIA (NVDA), and Broadcom (AVGO). The common P/E ratio of the respective rivals is 30.4, and the typical P/FCF ratio is 31.5. Based mostly on comparable business friends, Micron needs to be buying and selling round $241.68 per share based mostly on earnings, and $134.69 per share based mostly on free money stream. Let’s take a look at Micron’s rivals year-over-year earnings and free money stream progress to point out why Micron deserves to be buying and selling inside the similar valuation metrics as they do.

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

Micron’s backside line progress has both outperformed or been proper according to all of its comparable rivals. Based mostly on Micron’s efficiency and business peer valuations I firmly imagine a good market worth for Micron could be round $188 per share. That is the median determine between earnings and free money stream values derived from comparable competitor valuations.

Micron’s steadiness sheet can also be extraordinarily sturdy. Let’s take a look at money available, retained earnings, shareholders fairness, debt-to-equity, and present ratio.

• Money available: $10.12 billion as of 2Q22.
• Retained earnings: $43.41 billion as of 2Q22.
• Shareholder Fairness: $47.84 billion as of 2Q22.
• Debt-to-equity: 0.1271 as of 2Q22.
• Present ratio: 3.108 as of 2Q22.

Micron’s steadiness sheet raises no considerations in any respect. The corporate has loads of money available and way more fairness than debt. Retained earnings and shareholder fairness are fruitful and have been rising persistently. Actually, 2Q22 TTM retained earnings are up 25% from the identical quarter final yr and shareholder fairness is up 17.66%. Present property are valued 3:1 in comparison with present liabilities. The steadiness sheet appears to be like nice to me.

I’d additionally like to handle another optimistic figures. Micron’s FY21 money from investing got here in at ($10.59) billion, up 39.5% from FY20. Micron invested extra in FY21 than every other yr within the firm’s historical past. Micron’s present weighted common price of capital (WACC) sits at 8%, with its return on invested capital (ROIC) sitting at 18%. This reveals Micron is producing double-digit returns on its invested capital, and Micron is investing closely as seen by FY21’s money from investing figures. Money from operations has adopted go well with properly with FY21’s determine coming in at $12.47 billion, up 50% from FY20.

Micron has produced spectacular bottom-line progress and has a safe steadiness sheet. Micron is performing simply as properly and usually higher than comparable rivals but is buying and selling properly beneath their respective valuation metrics. These figures clearly present that Micron is undervalued and is a robust purchase. I imagine the corporate’s intrinsic worth could be within the $188 per share vary, representing greater than 100% upside from present market costs.

In search of Alpha’s quant score, authors, and Wall Road analysts suppose Micron’s a purchase too

Under are the indications from In search of Alpha’s quant score, In search of Alpha authors, and Wall Road analysts.

Dangers related to an funding in Micron Expertise

The semiconductor business is cyclical in nature. This can be a danger price monitoring as I’ve seen stories and analysts stating that they imagine chip shortages may soften within the second half of this yr. Nevertheless, there are different stories citing that shortages will persist properly into subsequent yr. If demand for chips fall, we might even see a peak in semiconductors someday this summer season. This might not fare properly for Micron and its buyers and is a danger price monitoring. I imagine the cyclical nature of chips is coming to an finish. With the whole lot starting to run digitally and, on the cloud, I imagine demand goes be persistently sturdy for the foreseeable future. Each new telephone, gaming console, automobile, and laptop is coming with increasingly reminiscence. That is notably favorable for Micron as the guts of its enterprise lies in reminiscence. However, the cyclical nature of semiconductors is a danger price noting and maintaining a tally of.

Micron has cited that the procurement of sure uncooked supplies may enhance prices transferring ahead. No adverse impacts are anticipated on near-term manufacturing, and it is not clear how vital the fee will increase may be. Traders ought to monitor margins and value of products bought in upcoming stories to verify backside line is not too adversely affected. There isn’t a data relating to how a lot these elevated prices could have an effect on backside line. I view this as a possible danger and it is price monitoring.

Whereas I imagine demand for chips will stay sturdy, inflation may damage demand. If client budgets get too tight, many chip-using gadgets may fall out of the price range. I will probably be maintaining a tally of income and firm updates to gauge demand power.

Conclusion

In conclusion, I imagine Micron Expertise is an absolute purchase for nearly any portfolio. The macro-outlook for the corporate is promising, demand continues to be sturdy, and bottom-line progress has been spectacular. Micron is buying and selling properly beneath the valuation metrics of comparable business rivals whereas concurrently producing higher bottom-line outcomes. I discover the dangers related to Micron to both be momentary or short-term. As a long-term investor these do not hassle me. I extremely suggest shares of Micron Expertise and imagine the corporate’s intrinsic worth is greater than double its present market ranges.