Micron technology (NASDAQ: MU) is my number one recommendation for now. The stock is down around 32% from the highs seen in January and is probably one of the most undervalued stocks in the broader market. Low lineup growth has been impressive, demand for DRAM and NAND is strong, and the cyclical nature of semiconductors appears to be fading. That’s why I buy Micron stock like a kid in a candy store.
DRAM and NAND demand growth is in double digits
As the tech industry continues its rapid growth, the demand for Bits follows suit. Whether it’s phones, computers, data centers, vehicles or game consoles, memory is one of the most sought-after commodities on the market. Micron provides the best products available on the market, from DDR5 to NVMe 2400 SSD, the first 176-layer QLC NAND. Micron expects the industry’s DRAM demand growth to be in the mid-to-teens, with around 30% demand growth for NAND in CY22. Micron sells DRAM and NAND as fast as it produces it and expects reductions in production costs for 1-alpha DRAM and its 176-layer NAND nodes. In short, demand for DRAM and NAND is growing by double digits and production costs are falling.
The evolution of the automotive industry is excellent for Micron
The automotive industry needs serious memory capabilities, especially with standalone software. Micron currently supplies approximately 50% of the auto memory market and, according to TrendForce, the DRAM market in the automotive industry is expected to grow at a CAGR of 30% through FY24. memory that autonomous vehicles will use varies widely. Regardless of what it will be, the amount of memory required will be huge. Depending on the data, I found estimates ranging from 0.3 terabytes per day to over 32 terabytes per day. This means the vehicles would need memory capacities to collect and store up to 32 terabytes of data per day before the data is transferred to the cloud. This is absolutely huge for Micron in two ways. First, the vehicles themselves will need large memory capacities to collect autonomous driving data. Considering Micron has around 50% of the auto memory market, it’s clear the potential here is incredible. Then the memory will have to be stored in the cloud (data centers) to be used to continuously improve the autonomous driving software. Micron’s data center revenue has increased more than 60% year over year since the second quarter. Self-driving software development will provide an extremely lucrative opportunity for Micron. If you don’t think autonomous software will come to fruition, two of the biggest companies in the world – Tesla (TSLA) and Alphabet (GOOG) Waymo – are aggressively developing it. Waymo has provided thousands of driverless rides in robo-taxi in Phoenix, and I think we’re all familiar with Tesla’s Autopilot.
Micron is undervalued and an absolute buy at current market levels
Micron’s earnings growth has been impressive, beating many earnings estimates. FY21 revenue was $27.70 billion, up 29.19% from FY20. Free cash flow was $2.438 billion, up 2,837% from FY20. Earnings were $5.14 per share, up 117% from fiscal 2020. Micron’s P/E ratio is approximately 8.4 and its P/FCF ratio is about 15.54. Both of 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 is expected to trade around $241.68 per share based on earnings and $134.69 per share based on free cash flow. Let’s take a look at the earnings and free cash flow growth of Micron’s competitors year over year to show why Micron deserves to trade within the same valuation parameters as them.
- 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. Free cash flow per share FY21: $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 net income growth either exceeded or was in line with all of its peer competitors. Based on Micron’s performance and industry peer reviews, I strongly believe that a fair market value for Micron would be around $188 per share. It is the midpoint 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, retained earnings, equity, debt ratio and current ratio.
- Cash: $10.12 billion in 2Q22.
- Retained earnings: $43.41 billion in 2Q22.
- Equity: $47.84 billion in 2Q22.
- Debt ratio: 0.1271 in 2Q22.
- Current ratio: 3.108 in 2Q22.
Micron’s balance sheet raises no concerns. The company has plenty of cash and a lot more equity than debt. Retained earnings and equity are fruitful and increasing steadily. In fact, 2Q22 TTM retained earnings are up 25% from the same quarter last year and shareholders’ equity is up 17.66%. Current assets are valued 3:1 to current liabilities. The results seem excellent to me.
I would also like to talk about other positive numbers. Cash from Micron’s investments for FY21 was $10.59 billion, up 39.5% from FY20. Micron invested more in FY21 than in any another year in the company’s history. Micron’s current weighted average cost of capital (WACC) is 8%, with a return on invested capital (ROIC) of 18%. This shows that Micron is generating double-digit returns on its invested capital, and Micron is investing heavily, as evidenced by FY21 cash from investment numbers. Cash from operations followed suit, with the FY21 figure of $12.47 billion, up 50% from FY20.
Micron has achieved impressive earnings growth and has a strong balance sheet. Micron performs as well and generally better than its peer peers, but trades well below their respective valuation metrics. These numbers clearly show that Micron is undervalued and a solid buy. I believe the intrinsic value of the company would be in the order of $188 per share, which is more than 100% upside from current market prices.
Researching Alpha’s quantitative rating, authors and Wall Street analysts think Micron is also a buy
Below are indications of the quantitative rating of Seeking Alpha, Seeking Alpha authors and Wall Street analysts.
Risks Associated with an Investment in Micron Technology
The semiconductor industry is cyclical in nature. This is a risk worth watching as I have seen reports and analysts indicating that they believe chip shortages may ease in the second half of this year. However, other reports indicate that the shortages will persist into next year. If demand for chips drops, we could see a spike in semiconductors this summer. This would not go well for Micron and its investors and is a risk worth watching. I believe the cyclical nature of tokens is coming to an end. With everything starting to work digitally and, on the cloud, I think the demand will still be strong for the foreseeable future. Every new phone, game console, vehicle and computer comes with more and more memory. This is particularly favorable for Micron because the core of its business lies in memory. Nevertheless, the cyclical nature of semiconductors is a risk worth noting and monitoring.
Micron indicated that the purchase of certain raw materials could increase costs in the future. No negative impact is expected on production in the short term, and the significance of cost increases is unclear. Investors should monitor margins and cost of goods sold in future reports to ensure the bottom line is not affected too much. There is no information on the potential impact of these cost increases on the bottom line. I see this as a potential risk and worth watching out for.
Although I think demand for chips will remain strong, inflation could hurt demand. If consumer budgets get too tight, many chip-based devices could fall out of budget. I will be keeping an eye on earnings and company updates to gauge the strength of demand.
In conclusion, I think Micron Technology is an absolute buy for almost any wallet. The company’s macroeconomic outlook is promising, demand is still strong and earnings growth has been impressive. Micron trades well below the valuation metrics of comparable industry competitors while simultaneously producing better bottom lines. I find the risks associated with Micron to be temporary or short term. As a long-term investor, that doesn’t bother me. I highly recommend Micron Technology stock and believe the company’s intrinsic value is more than double its current market levels.