MU with Nobias Technology: Case Study on Micron Technology
It’s been a rough year for the semiconductor industry. Year-to-date, the iShares Semiconductor ETF (SOXX) is down by 36.79%. Investors fear that a macro economic slowdown will hurt semiconductor demand. And while it’s unclear whether or not the macroeconomic weakness that we’ve seen throughout 2022 will result in a recession, and if so, how deep or long lasting the economic plight will be, in the near-term, the semiconductor space has been hampered by supply chain issues related to the COVID-19 pandemic which has created a perfect storm of sorts, with regard to the negative sentiment surrounding this industry.
Micron Technology, a large-cap player in the semiconductor space, is down by 42.27% year-to-date thus far. Micron just reported its fiscal 2022 third quarter results and coming into the report, the credible authors and analysts that the Nobias algorithm tracks were very bullish on shares. Despite immense fundamental volatility and recent share price weakness, MU has posted significant outperformance over the last 5 and 10-year periods. Therefore, we wanted to analyze the stock with the Q3 results in mind.
Micron is a very cyclical company - from a fundamental perspective - with its earnings-per-share showing incredible volatility as broader semiconductor cycles rise and fall. For instance, in 2015, MU generated $2.72/share in EPS, only to see that bottom-line figure fall by approximately 98% to just $0.06/share in 2016. Then in 2017, MU’s earnings-per-share rallied by nearly 8,200%, up to $4.96.share. Micron’s EPS doubled again in 2018, rising to $11.95. However, the company’s earnings were cut in half each of the next two years, falling to just $2.83 by the end of fiscal 2020. In fiscal 2021, MU’s earnings rose by 114%, back up to $6.06/share. And, coming into the Q3 2022 results, the consensus analyst estimate for MU’s bottom-line during the full year this year was $9.43, meaning that Wall Street expects to see 56% growth this year.
MU Jun 2022
Needless to say, this company isn’t for the faint of heart with this sort of fundamental rollercoaster constantly playing out. But, MU has treated investors who have the intestinal fortitude to overlook the volatility and stick with the stock well. Over the last 10 years, MU shares are up more than 722% (well above the 179% gains that the S&P 500 has posted during this same period of time). Now, with the Q3 numbers in hand, we wanted to examine recent reports on the stock to see whether or not this is a dip worth buying.
Patrick Seitz, a Nobias 4-star rated author, recently published an article at Investors.com, titled, “Is Micron Stock A Buy Ahead Of Chipmaker's Earnings Report?” Seitz touched upon Micron’s operations, writing, “Boise, Idaho-based Micron makes two main types of memory chips: DRAM and Nand. DRAM chips act as the main memory in PCs, servers and other devices, working closely with central processing units. Nand flash provides longer-term data storage.”
Regarding the company’s revenue balance, he stated, “Dynamic random-access memory, or DRAM, accounted for 73% of Micron's revenue in its fiscal second quarter. Nand flash memory accounted for 25% of its revenue during the period.” And, regarding MU’s industry competition, Seitz wrote, “In DRAM chips, MU stock competes with South Korea's Samsung Electronics and SK Hynix. In Nand flash chips, Micron competes with Samsung, SK Hynix, Kioxia and Western Digital (WDC).”
Looking back at MU’s Q2 results, Seitz said, “Late on March 29, Micron easily beat Wall Street's targets for its fiscal second quarter and guided higher for the current period.” He continued, “It was the company's fifth straight quarter of triple-digit percentage gains in earnings per share.”
More recently, on 5/12/2022, Seitz noted that the company held an Investor Day and he went on to highlight the company’s future-looking commentary. Seitz wrote, “Executives also discussed the company's strategy for expanding its share of the memory and storage markets through technology leadership. It sees automotive and data-center business driving its growth.” He also noted a plan by the company to “entice” customers to sign 3-year deals for DRAM chips, which would help to smooth out some of the aforementioned fundamental volatility that MU has been known for in the past.
Lastly, Seitz put a spotlight on shareholder returns, saying, “In addition, Micron raised its quarterly dividend by 15% to 11.5 cents per share. The chipmaker also is accelerating its share repurchasing.” Looking ahead to the company’s Q3 report, he stated, “For the current quarter, Micron predicted adjusted earnings of $2.46 a share on sales of $8.7 billion. That would translate to year-over-year growth of 31% in earnings and 17% in sales. Wall Street had projected earnings of $2.24 a share on sales of $8.13 billion.”
But, even with all of this in mind, Seitz’s technical analysis concluded that, “Micron stock is not a buy right now.” He said, “Micron stock is trading below its 50-day and 200-day moving average lines.” He continued, “It needs to form a new base in the right market conditions before setting a potential buy point.”
Growth at a Good Price, a Nobias 5-star rated author, also recently published an article highlighting their opinion on MU stock heading into the third quarter report. Growth at a Good Price wrote that some of the negative sentiment surrounding MU shares recently was due to falling prices seen on the DRAM exchange; however, they note, “One big reason why I'd trust Micron's guidance over RAM price charts is because Micron does not make most of its money selling to consumers. “ The author continued: “Instead, it makes money selling to:
Phone manufacturers;
Data centers;
Computer manufacturers;
Other semi companies.
Micron divides its revenue by segment in its quarterly presentations. For the most recent quarter, the breakdown was:
$3.46 billion in compute and networking;
$1.87 billion in mobile;
$1.17 billion in storage;
$1.27 billion in embedded.”
Another reason that MU’s share price is down is because investors widely view the company’s products as commodities and therefore, it’s often believed that MU doesn’t have a defensible competitive moat. But, Growth at a Good Price addressed this concern stating, “Micron is working toward making its products less "commodity-like" in the future. In pure economic terms, RAM and Flash storage are commodities, but Micron is working on differentiating its products. It is tailoring its DDR5 memory to be low power and high-speed, and it has the fastest discrete graphics memory around. As memory becomes more specialized, it may cease to be a commodity.”
Furthermore, looking backwards at the trailing 12 month period, Growth at a Good Price highlighted MU’s “incredible results” writing that the stock is “Micron stock is already outrageously cheap”.
Regarding the company’s financials, they wrote: “In the most recent 12-month period, Micron delivered:
$31 billion in revenue, up 32%;
$10.4 billion in EBIT, up 187%;
$9 billion in net income, up 182%;
$15 billion in operating cash flow ("OCF"), up 62%;
$4.34 in free cash flow ("FCF") per share, up 330%.”
The author also noted, “On top of that, margins were high. For example, with $9 billion in net income on $31 billion in sales, you get a 29% net margin. So, Micron is very profitable.”
Growth at a Good Price also analyzed MU’s balance sheet and ultimately concluded, “From these balance sheet metrics we get a 0.125 debt to equity ratio and a 3.11 current ratio, suggesting high solvency and liquidity. So, Micron is not at risk of going bankrupt or experiencing liquidity problems.” The author then touched upon MU’s 6.8x adjusted price-to-earnings ratio and stated, “At this point, Micron is approaching liquidation value. So, this is one stock that every value investor should take a serious look at.”
In the end, this author offered a much more bullish conclusion than Seitz, writing, “The bottom line on Micron is that it's a combination of growth and value that you rarely see side by side in the same stock. This is a company that is growing earnings at 180%, yet has a P/E ratio barely above 5. It certainly looks like a good value. And if its efforts at product differentiation and long term contract pricing succeed, it will prove to be one.”
When Micron reported earnings after the market’s closing bell on 6/30/2022, the company posted revenue of $8.64 billion, which was in-line with Wall Street’s consensus estimate and non-GAAP earnings-per-share of $2.59, which beat consensus estimates by $0.15/share. The company highlighted its cash flow generation stating that it produced “Operating cash flow of $3.84 billion versus $3.63 billion for the prior quarter and $3.56 billion for the same period last year”.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Micron’s CEO, Sanjay Mehrotra, began the press release stating: “Micron delivered record revenue in the fiscal third quarter driven by our team’s excellent execution across technology, products and manufacturing. Recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth in fiscal 2023. We are confident about the long-term secular demand for memory and storage and are well positioned to deliver strong cross-cycle financial performance.”
The company provided guidance for the upcoming fourth quarter as well, calling for sales of approximately $7.2 billion (plus/minus $400 million), gross margin of 42.5% (plus/minus 1.5%), operating expenses of $1.05 billion (plus/minus $25 million), and non-GAAP earnings-per-share of $1.63 (plus/minus $0.20/share). Micron shares traded down 1.50% during the after hours in response to this news.
However, looking at the opinions expressed by the credible authors and analysts that Nobias tracks, it’s clear that the vast majority of them remain very bullish on MU shares. 95% of recent articles published by the credible authors that we track have expressed “Bullish” sentiment for MU. Right now, the average price target being applied to MU shares by the credible Wall Street analysts that we track is $88.57. Today, MU trades for $55.28, meaning that this average price target implies upside potential of approximately 60%.
Disclosure: Nicholas Ward has no MU position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.