Micron Is A Broken Stock, Not A Broken Company
Looking for a dip buying opportunity, look no further...
Introduction
Despite reporting robust business performance in recent quarters, Micron Technology (MU) finds itself stuck in a deep drawdown, with the memory giant's stock sitting ~45% off its July 2024 peak:
In today's report, we shall review Micron's business performance, re-evaluate MU's long-term risk/reward, and analyze its technical chart to formulate an informed investment decision. Let's go!
Micron: By The Numbers
The semiconductor industry is cyclical, and as one of the leading memory [DRAM and NAND] manufacturers in the world, Micron showcases the ebbs and flows of this space:
While memory markets are highly commoditized and prone to cyclical downturns, Micron is currently seeing tremendous demand for its HBM (high bandwidth memory) products with AI infrastructure buildout in full swing.
So much so, Micron recently unveiled a price hike:
And this hike has come on the back of a solid Q2-FY2025 earnings print and stronger-than-expected Q3-FY2025 sales guidance:
Now, Micron bears have been citing "margin contraction" as a potential indication of another impending cyclical downturn, but given Micron's post-Q2 price hikes (coming in response to un-forecasted AI demand), I think any near-term margin deterioration fears are way overblown.
Yes, there will be another cyclical downturn at some point in the future, and Micron will likely suffer a painful contraction then. However, for now, Micron's management and Wall Street analysts are projecting double-digit growth through 2026:
Micron Fair Value And Expected Return
Using conservative assumptions for future growth and margins, TQI's fair value estimate for Micron Technology stands at $90.17 per share, i.e., MU stock looks fairly valued at current levels.
Now, predicting where a stock will trade in the short term is impossible; however, over the long run, a stock will track its business fundamentals and obey the immutable laws of money. If the interest rates were to return to artificially low levels (i.e., ZIRP), higher equity multiples would be justifiable. However, I work with the assumption that interest rates will eventually track the long-term average of ~5%. Inverting this number, we get a trading multiple of ~20x (P/FCF).
Assuming an exit multiple of ~20x P/FCF, I can see Micron stock trading at ~$192 per share five years from now. This price target implies a 5-year CAGR return of +17.26%.
With Micron's 5-year expected CAGR return exceeding TQI's investment hurdle rate of 15%, I now rate MU stock a "Buy".
Concluding Thoughts
From a technical perspective, Micron is a broken stock trading under most key moving averages, with the 200-week MA support at ~$80 now firmly in sight.
That said, with RSI trending higher and forming a divergence with price, I think we are in a bottoming process. While MU stock may slip to mid-double-digits in the event of a recessionary bust, I like the idea of allocating fresh capital in MU stock via DCA accumulation for the long haul. Yes, semiconductor memory is cyclical, but with the explosive growth of data/AI/ML in all facets of life, I strongly believe that more memory chips will be required in the future than what's required today. Micron is a clear leader in this space, and its stock is priced attractively enough to restart a long position.
Key Takeaway: I rate Micron a "Buy" in the $80s, with strong preference for accumulation via a 6-12 month DCA plan.
Thanks for reading, and happy investing! Please share your thoughts, questions, or concerns in the comments section below.