Micron Technology, Inc. (NASDAQ:MU) has seen its shares rise rapidly over the past two months thanks to a recovery from an unwarranted decline in the share price last fall. With macro tailwinds, Micron is gaining strength in areas such as data centers, and with strong cash flow and an inexpensive valuation, Micron has additional upside potential over the course of the year. In progress. This is despite the fact that stocks are already up more than 40% from their 52-week low.
Key Metrics for UM Actions
Micron is one of the largest DRAM producers in the world. Due to high demand – DRAM is needed for all sorts of technologies, including big data, computing, smartphones, autonomous driving, and more. – Micron has been able to generate attractive revenues in the recent past:
Since the start of 2020, Micron’s trailing twelve-month revenue has steadily increased, which has been possible thanks to an upward trend in the company’s revenue quarter over quarter. This came to a halt in the last quarter when MU’s revenue declined sequentially. But even at the current rate, Micron Technology’s ttm revenues could continue to grow for some time. Quarterly revenue of $7.7 billion equates to approximately $31 billion in annual revenue, which is higher than the current ttm figure of just under $30 billion. Revenues are generally influenced by two key factors, Micron’s sales volumes and its ASP, or the unit price it is able to charge customers. Sales volumes have historically grown relatively steadily as our modern lifestyle requires an increasing amount of memory power for communication, entertainment, commerce, and more.
However, prices do not improve steadily, as there are times when the supply and demand situation is more favorable to memory producers such as Micron (resulting in high ASPs), and times where supply is growing faster than demand, i.e. when ASPs are contracting. . This can lead to lower revenue despite higher sales volumes. In the past, when the memory industry was more fragmented, these cycles were more pronounced. They have become less severe in the recent past due to industry consolidation. With the memory industry being an efficient oligopoly, unreasonably large supply growth is no longer a major concern, which is why Micron’s revenues and profits have become less cyclical over the past decade. However, a certain cyclicality still exists. Micron has also moved into higher value segments in the memory industry, such as high bandwidth memory, where Micron is active with its HBM2E offering. Micron’s Authenta technology, which enables additional system-level protection in IoT devices and similar products, is another way Micron is delivering value-added products that aren’t commodity products. In these less generic and less standardized product categories, Micron can more easily demand fixed prices and enter into longer-term contracts, further reducing cyclicality. This, combined with the aforementioned factors such as the better-functioning oligopoly and long-term demand that looks good, should make Micron an even less cyclical company over the years. Less pronounced cyclicality has significant tailwinds and should allow for more consistent returns to shareholders and could also justify a higher valuation (e.g. higher earnings multiple).
Micron’s cash flow has increased in recent quarters. Based on the close correlation to the company’s EBITDA, which is expected to increase massively this year and next, investors can expect further growth in cash generation from Micron. If Micron reaches analysts’ estimate of $22.5 billion in EBITDA next year (September 2022 to August 2023), the company could generate more than $20 billion in cash from operations that year. . Compared to a current market capitalization of around $100 billion, that would be very compelling. Strong cash flow would also allow for a further increase in returns for Micron shareholders, either through more aggressive buyouts or through higher dividend payments (or both).
According to Micron Technology’s latest 10-Q filing, the company had $9.6 billion in cash on its balance sheet at the end of November, partially offset by $7 billion in short- and long-term debt. In total, this represents net cash of nearly $3 billion, giving Micron a very healthy balance sheet. It also offers plenty of options when it comes to making acquisitions, increasing capital expenditures or increasing shareholder returns.
To watch in 2022
In the current fiscal year, which ends in August, Micron is likely to generate very attractive profits. More importantly, current forecasts call for Micron to generate even higher earnings in fiscal 2023:
With Micron likely to earn around $9 this year, and $12 and $13 the next two years, the company will be very profitable for three consecutive years. Compared to the cyclicality Micron has experienced in the past, this is a significant feat. This can be attributed to the factors mentioned above, such as strong demand, a move towards less cyclical product lines, etc. The current global shortage of semiconductors is also a tailwind, as it allows for high prices.
Micron shares have already risen about 40% in the past two months since the fall 2021 low, but the shares have more upside potential. Investors should keep an eye out for announcements from Micron and its peers regarding capital expenditure plans. If Micron and/or other members of the memory oligopoly (Samsung (OTC: SSNNF) and SK Hynix) are getting too aggressive with capacity expansion plans, which could negatively impact supply and demand. Lower average selling prices would harm all members of this oligopoly, including the company that started it all by expanding its production capacity too aggressively. For all three players, it is important that capacity additions are in line with or below the expected growth in demand. Plans to add capacity from Micron and its peers are therefore an important item for Micron shareholders to watch, as this will likely impact MU’s profitability in the coming years, albeit with a lag in time, because it takes a while for new fabs to arrive. in line.
Investors will also be very interested to see where Micron goes with regards to its shareholder return program. The company currently pays $0.10 per share per quarter in dividends, which is a yield of about half a percentage point. With a payout ratio of around 5%, Micron could easily increase its dividend spending significantly. Even if the company were to increase the payout by 300%, it would only have a dividend payout ratio of around 20%, which would still be quite conservative.
Due to a low valuation, management is likely to continue to favor buyouts as a form of returning cash to company owners for the time being. That makes sense, especially if one is positive about United’s long-term prospects, which seems to be the case for management. With Micron getting a new CFO (its CFO became CFO at Intel (NASDAQ: INTC)), there is some uncertainty about Micron’s future cash return policy. Investors are likely to get more information on this in upcoming earnings calls and shareholder events.
What is Micron Technology’s price target?
Micron has risen sharply since the $60 low, but its shares are by no means expensive today. Based on projected earnings for the current year, Micron is trading at 10.7x net earnings, while the earnings multiple for the year ahead stands at just 8x. So it’s no surprise that analysts see solid upside potential for Micron’s stock prices over the next year:
Based on a 12-month price target of $108, Micron has around 15% upside potential according to Wall Street. I think Micron should be trading at 9x forward net earnings or more at the start of its 2023 fiscal year, i.e. in the fall of 2022. That brings us to a price target of $105, which which implies a potential upside of around 10% from the current level.
Is MU stock a buy, sell or hold?
Micron is quite profitable today and will see its profits grow even further in the future. Stocks don’t look expensive at all today, being valued at just 8 times next year’s net earnings. Cash flow is expected to improve, opening up the possibility of more ambitious shareholder returns in the future, although we don’t yet know what the company’s next CFO (not yet announced) is aiming for. respect.
Micron has, I believe, a solid 10%+ upside over the next year. At the same time, stocks aren’t as shockingly cheap as they were last fall when they traded below $70, so the risk-reward ratio has deteriorated somewhat.
We called Micron a Buy last fall, but as the stock has returned 30% since then, we’re a little less bullish today. Overall, I think Micron is still a very solid investment, but waiting for a more opportune entry point could pay off, as MU is currently trading quite close to the 52-week high.