Micron Technology: Stock Dip Contrasts with Strong Business Fundamentals

Micron: Recent Dip Does Not Reflect Fortifying Fundamentals (NASDAQ:MU)

Micron's aggressive R&D investments and rapid product rollouts highlight the company's strong innovation pipeline and position it to capitalize on favorable secular trends. Introduction Micron Technology, Inc. (NASDAQ:MU) stock has declined by around 23% since May 20, which means that my "Strong Buy" recommendation is not doing well so far. At the same time, my fundamental analysis suggests that Micron is still very strong fundamentally and enjoys massive growth momentum across all segments. The pullback since my previous thesis made the valuation compelling, and I am inclined to give MU a "Strong Buy" rating again. Fundamental analysis Micron's closest earnings release is scheduled for September 27. According to quarterly earnings estimates, revenue is expected to grow by 91.3% YoY. The EPS will improve YoY from -$1.07 to +$1.12. Moreover, EPS will almost double on a QoQ basis, which is also crucial. According to quarterly estimates, Micron is expected to sustain an above 40% YoY revenue growth over at least the next six quarters. Therefore, revenue growth momentum is still very strong, which is an apparent fundamental plus. Such a strong optimism from consensus is explainable, and I agree with this optimism. Micron's biggest segment, CNBU, is heavily tied to cloud server demand. The AI boom has driven substantial growth in the cloud industry over the past few quarters. Synergy Research Group notes that the cloud market's growth remained strong in calendar Q2, 2024. The company highlighted that robust demand for AI servers was a key driver of its strong financial performance in fiscal Q3. A strong indication of accelerating momentum in CNBU is its strong 18% QoQ revenue growth in FQ3. Since tech giants continue ramping up their investments in data centers, I expect this trend to remain strong for longer. Another indication of the company's fundamental strength is its robust business mix. The above by-segment revenue growth breakdown suggests that all four business units delivered massive YoY growth. Another positive sign to me is that apart from CNBU, all other segments have approximately the same weight, which is good to mitigate concentration risks. Another strong bullish information is that Micron has sold out its high-bandwidth memory ("HBM") capacity up to 2025. There are still four months left in 2024, and the fact that the company sold out in HBM capacity for the next year is very impressive. This clearly indicates robust demand from customers, which will fuel impressive revenue growth for longer. Another indication of the company's fundamental strength is Micron's aggressive ramping up of investments in R&D. The company's pace of initiating and rolling out new products is impressive, meaning that R&D spending is quite efficient. In early August, the company announced that it develops the industry's first PCIe Gen6 Data Center SSD for ecosystem enablement. Just a few days before this announcement, Micron said that it started volume production of 9th generation NAND flash technology. In late July, Micron also introduced the innovative Micron 9550 PCIe Gen5 SSD, which the company claims to be the world's fastest data center SSD. I believe that it is a crucial development as the SSD industry is thriving, and it is expected to observe a 17.6% CAGR over the next five years. Valuation analysis Prefer to start my valuation analysis by looking at how MU's forward P/E is going to behave in the upcoming years. According to Seeking Alpha's below table based on consensus estimates, Micron's P/E ratio will be slightly above 10 in FY 2025 and as low as around 8 in FY 2026. These are extremely low levels that clearly point to substantial undervaluation. To figure out the stock's fair value, I need to run a discounted cash flow ("DCF") simulation. Future cash flows will be discounted using an 8.35% WACC. Revenue estimates for 2024-2026 from consensus are based on the opinions of at least 20 Wall Street analysts, which I find sufficiently representative. For the years beyond 2026, I prefer to take a conservative approach by factoring in a notable five-percentage-point revenue deceleration annually. However, given strong industry tailwinds, I believe Micron can achieve a steady 4% constant growth rate, which will be used to calculate the terminal value ("TV"). I incorporate a zero FCF margin for FY2024 because Micron's TTM leverage FCF margin is negative. However, the adjusted EPS is expected by consensus to expand by several times in FY 2025, achieving a $9.4 level. The last time Micron delivered a comparable EPS was in fiscal year 2018, when the company achieved a 12.9% levered FCF margin. Therefore, I've incorporated this margin for FY 2025. Given that my analysis indicates MU is well-positioned to benefit from AI tailwinds, I believe FCF margin improvements should be considered. However, since the revenue growth assumptions are already aggressive, I think it's prudent to be more conservative with FCF margin expansion, projecting a reasonable one percentage point increase per year. There are currently 1.11 billion outstanding MU shares. MU's fair share price is $133, approximately in line with my previous estimate. After the recent dip, MU trades with a deep 36% discount, which is an attractive deal for one of the AI winners. Mitigating factors Micron is not a monopolist in the industry. Direct competitors are formidable players, and Samsung Electronics (OTCPK:SSNLF) is the closest rival. This behemoth far surpasses Micron in size, contributing over 20% to South Korea's GDP and boasting enormous financial strength. The two companies are not comparable when it comes to financials, both on the income statement and balance sheet. Consequently, Micron is exposed to significant competitive threats. However, memory solutions are only a part of Samsung's broader business, whereas Micron is solely focused on this sector. This focus might provide Micron with an innovative edge where the companies go head-to-head. Readers should also note that 2023 was an extremely challenging year for Micron. Challenges were largely due to the effects of the U.S.-China geopolitical tensions. The ban on selling Micron's chips in China was a big adverse factor. It caused the company's revenue to nearly halve from 2022 levels. Micron's ties to the Chinese market remain significant, as the FY 2023 10-K report shows over $2 billion in revenue from Mainland China, and the company also operates manufacturing facilities there. Micron's exposure to China still presents considerable geopolitical risks. But the worst is likely over from this perspective. Conclusion I think that Micron Technology, Inc. is a fundamentally strong company, and its stock is very attractively valued. Therefore, I reiterate my bullish opinion about MU. Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Coming from an IT background, I have dived into the U.S. stock market seven years ago by managing portfolio of my family. Starting managing real money has been challenging for the first time, but long hours of mastering fundamental analysis of public companies paid off and now I feel very confident in my investment decisions. My hands-on experience shaped deep understanding of risk, reward and the delicate balance between these two variables. Driven by a desire to share my insights and contribute to the investor community, I embark on this new chapter with Seeking Alpha. My articles will be crafted with clarity and precision, devoid of jargon and fostering accessibility for investors of all experience levels. My background in IT grants me a valuable perspective, particularly when navigating the complexities of technology stocks. Yet, my pursuit of knowledge extends beyond the realm of silicon, encompassing diverse sectors and uncovering promising prospects across the economic landscape. Whether you are a seasoned investor seeking fresh perspectives or a nascent one embarking on your financial voyage, I extend a warm invitation to join me on this intellectual journey. Through collaborative exploration and insightful analysis, let us unlock the secrets of the market and chart a path towards shared financial success. Analyst's 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. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The Difference Between Micron The Stock And Micron The Business (NASDAQ:MU)

Looking for more investing ideas like this one? Get them exclusively at Tech Cache. Learn More " It's no secret the industry Micron (NASDAQ:MU) operates in, and its stock doesn't always line up. In fact, I've outlined in detail before how the stock peaks in advance of the business fundamentals and bottoms ahead of the memory environment bottoming. Both the stock and the industry require constant review because this industry moves quickly. One quarter to the next can be a surprise in terms of guidance and the state of the DRAM and NAND industry. And so, with the business clearly now trending in the right direction, how does one make sense of Micron's "lagging" chart? Well, the clarity I get by analyzing the business while concurrently analyzing its chart may put some pieces of the puzzle together for you. Many of you have followed me over the years knowing I cover all things tech, but now I have a soft spot for semiconductors, particularly Micron. I've called the turns in Micron's business and chart over the years, with this past bottom in late 2022 my most accurate. You might wonder how - was it a fluke, or were there indicators both fundamentally and chart-wise? The answer is yes, it's both, and it's not one without the other, but the chart side has brought me an edge. With Micron hitting new highs over the last few months and since pulling back nearly 45% at the depth of the selloff in early August, it makes one wonder whether the chart's peak is already in, even if the fundamentals have yet to even take off. This article answers that question. A Check On The Fundamentals I'll start by reviewing the business and memory market fundamentals, as any weakness here can lead to hesitant investors. No one wants to be caught riding the memory cycle down on the backend. The All Important Bits Shipped In this regard, not much has changed in the last two quarters. However, there's been a slight shift in the outlook for near-term bit shipments. If you've read me for any length of time, you'll know bit shipments are one of the biggest keys to understanding the memory cycle - where it bottoms, where it tops, and how it progresses. So when I hear a change in guidance for bit shipments, my ears perk up. What I expected to be a low-key, hum-drum analyst conference earlier this month provided a slight shift in guidance regarding bit shipments. The bottom line is, management guided for a "strengthening" of bit shipments for the November quarter on the FQ3 call a few months ago. We forecast shipment growth to strengthen modestly in the November quarter. - Mark Murphy, CFO, Micron's FQ3 '24 Earnings Call However, at the KeyBanc analyst conference where Micron presented about three weeks ago, the tune changed slightly from modestly strengthening to flat for the FQ1 November quarter. That also follows guidance for FQ4 to be flat. So, instead of one flat quarter, it's now two flat quarters lined up. We forecast bit shipments to be flat sequential in the November quarter, for both DRAM and NAND. - Mark Murphy, CFO, KeyBanc Capital Markets Technology Leadership Forum (minute 4:39) The KeyBanc analyst followed up because it caught his attention. The CFO's answer to his question revolved around pricing and how it's still moving up, so the company is walking away from deals. Of course, no deal means no bits shipped. Indeed, this isn't the only situation, and Micron is making many good-priced deals this fiscal year, as the earnings report can attest to. However, the lingering snub of buyers unwilling to accept higher prices says something about the end market they're a part of. Now, this is both not important and important at the same time. It's not important because guiding two quarters out on bit shipments has much less visibility. Therefore, I don't hold them to something six months out with a guide like that. There's a margin of error for using "modestly," as used in this particular guide. But why is it important still? Something management wasn't expecting changed in that same visibility, enough to shift the guide to something lower while still being in the quarter before it. It's also important because the decision is in management's hands to take or leave the price negotiated now, as it has taken pricing control back from customers at this part of the cycle due to the strength and trajectory of memory pricing. Subsequently, walking away from deals allows for it to have inventory to sell later at better pricing. However, pricing better hold up for another quarter or two beyond these walkaways to get the price it's looking for - otherwise, this is a significant risk (I'll get to price shortly). If pricing doesn't, it didn't sell what it could have, and now it owns that inventory at likely higher production costs. So, is something like this enough to sway the cycle? No, not exactly. If it's a one-off guide isolated to a quarter, there's nothing to be concerned about other than minor adjustments to revenue estimates for FQ1. However, if the flat bit shipments continue, the implications are the market is weaker than management has let on. Even then, though, flat is not horrible. As pricing continues to climb, the flat bits each quarter are making more per bit, so revenue and gross margins continue to climb. But, like I said at the beginning of this article, bit shipments tell the tale, and pricing, as it does, lags the market's true colors. I'm not saying the memory market has peaked, nor has management, but you don't want to hear a string of flat bit shipped quarters, better pricing or not, at this stage of the cycle. So, an FQ2 guide (February quarter) of flat bits would make me uneasy. Pricing Holding Up Its End Of The Deal Outside of volume (bits shipped), the price per bit is the other significant factor driving the financials. This area hasn't had much let up since pricing began firming in FQ1 '24. As high bandwidth memory - HBM - has taken over the scene, many legacy fab lines have been converted to dedicating a bit of supply to HBM3e. Due to the complexity involved, it takes three times as many bits to produce the equivalent HBM as mainstream DRAM. This leads to structurally less supply in other end markets such as PC, mobile, and industrial. Thus, instead of bit growth through node transitions, as has been the case over the last several years, supply is decreasing overall. Now, even as signs of PC and mobile apparently show weakening, according to one analyst house, these aren't as impactful as supply is shrinking as fast or faster to keep the supply demand balance in Micron's favor. But more than that, even if there's temporary weakening in some areas like consumer and enterprise PC and mobile, not only is the content in each increasing, but its effect on the DRAM business as a whole has significantly reduced over the years. In 2022, the company expected PC, mobile, and "other" to become less than 38% of overall revenue (including NAND). Considering the rapid onset of AI in late 2022 and early 2023, HBM and its investments were pulled in and likely reached these revenue targets ahead of the FY25 target. I expect PC and mobile to make up less than 38% at this point and thus don't have the same impact as perhaps implied by analyst headlines. In fact, the result of whatever weakening is happening in these end markets is likely the slight shift in a bit of guidance I outlined earlier. If that's all the effect this sector weakness has on it, I'd say there's plenty of buffer in the revenue mix to offset it. Moreover, pricing is expected to continue climbing into 2025, according to Micron's management and outside analyst houses like Trendforce. Overall, while there are ebbs and flows in specific end markets, the overall outlook remains reasonably strong. However, it could be stronger if not for walking away from deals (as in, if customers were amenable to Micron's higher pricing). The risk is those deals never come back around because the memory supply and price environment deteriorate before getting there. If so, the company is stuck with a higher cost of goods inventory and no buyers. But we're not there yet to be considering that. It's just a tail risk for now. Overall, there's still enough pricing pressure and resiliency in high-growth markets like servers and AI to overcome perceived weakness in other areas, already known to be lagging behind the rest of the memory market. Matching It To The Chart Now, let's look at how the memory cycle is aligning with the stock's cycle. Several months back, I was tracking what I expected to be a top in a third wave on Micron's chart. I was expecting a pullback similar to the one we're seeing now before one final rally into all-time highs. However, as this decline continued deeper, I had to shift my analysis to consider the top was already in at $157. Allow me to give you the high-level view. In April (red arrow), I initially considered this the end of wave alt [5] of alt (3) of alt 3. Therefore, I was expecting waves alt (4) and alt (5) of alt 3 to lead to a top near $155. From there, a relatively shallow retrace in alt 4 would give way to a higher high near $170 in alt 5. However, that's not how it played out. And honestly, it was fairly clear it wasn't going back then (judging in hindsight). And that's because of the Fib levels. See, the Fib levels of this entire rally from December 2022 (right where I called the bottom) point to wave 3 topping at just over the 176.4% level, a typical extension for third waves. It's at this point when the chart was saying, "That's all the wave 3 you're going to get." Then, once the corrective structure of wave 4 developed and reached just below the 127.2% extension (typically, I see it go to the 100% extension), it was obvious it was getting ready for wave 5. And so it did, reaching above the typical 200% extension and putting in overtime for almost the 261.8% extension. Here's a cleaner version of the chart showing just that: Therefore, that high is most likely the top for this cycle (yes, I hear you). This brings us to this very deep selloff and bounce we're experiencing now. Due to the depth of this selloff, this appears to be a correction of a higher degree, and therefore, I'm expecting still lower lows to come. Currently, the stock is working wave (B) of this correction. Should we get a typical wave C within wave (B), I expect a bounce to around $125- $128 over the next few weeks. But from there, wave (C) is lurking, which could easily bring the stock to $70 over the weeks and months following the completion of (B). Yes, even as the fundamentals look pretty good. The timing looks suspiciously aligned with an earnings report catalyst for that wave (C) drop, so perhaps there's some worse news than I've already analyzed in this article. This means I'll trim my MU holdings more as this wave (B) approaches its target. After it completes, there's a risk of nearly 45% downside. Reconciling The Two So you might wonder how on earth Micron will be $70 when its EPS growth is through the roof. Well, fundamentals and sentiment (what chart analysis susses out) don't have to align at times. And when that (C) wave completes, it may just be completing a larger A wave. That means a B wave rally could ensue for all of 2025, giving the impression it's rallying alongside the financial growth and fundamentals. Now, B waves don't generally exceed the prior high, but they can. So we could see a typical retracement back to the $125-$140 area or even a poke above the prior $157 highs before a large C wave takes over, and we see even further lows than what I've outlined today. Micron investors, lend me your ears: Don't be married to the stock, and don't be caught (again, for many of us) up riding the downcycle. The memory industry's downcycle doesn't align with the chart; it never has. Just because it appears to be super early this time doesn't change that fact. I'm taking off more risk as this bounce completes, and will likely hedge the rest of the position with puts once the C wave begins sometime in the coming months. Join The Top AI And Tech Investing Group Do two things to further your tech portfolio. First, click the 'Follow' button below next to my name. Second, if you want more of this two-fold analysis, step up to being a paid subscriber to my Investor Group Tech Cache with a two-week free trial and read more of this type of analysis on other tech stocks and assets. Joe Albano is a tech insider with a background and education in electrical and software engineering. He has a unique understanding of current technology and innovation trends as well as what companies are best positioned for future growth across all areas of tech, including AI, as he has called it accurately over the last several years. Joe leads the investing group Tech Cache where he delivers industry insider expertise to those looking for the best long-term picks, trades, and technical analysis of tech and growth stocks. Features of the group include: access to Joe's personal portfolio, 2-3 weekly investment ideas, a weekly summary and preview newsletter, watchlist stocks, an automated stock rating system, and live chat. Learn more . Analyst's 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. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.