Micron Technology, Inc. (NASDAQ:MU) has taken advantage of the 90% year-to-date run-up in the MU stock price to issue another $1.2 billion in common shares. Micron announced the equity deal in early October and upsized by $200 million.
The timing could not be better given the buoyancy of the overall market and unfailing optimism toward tech stocks.
So, how should shareholders of MU stock view this deal? On one hand, the net effect of such a transaction means dilution for existing shareholders. But on the other hand, the newly raised funds will be used to shore up Micron’s balance sheet, which has been burdened by the debt.
MU Stock Common Offering Details
Per the announcement, MU intends to use about a third of the net proceeds of the offering “to redeem approximately $438 million in aggregate principal amount of its 7.500% Senior Secured Notes due 2023 and pay accrued and unpaid interest thereon.”
The remaining two thirds of net proceeds will also be put toward retiring debt instruments, though no specifics were provided. And then at the very end, there’s the obligatory catchall bucket of general corporate purposes.
I understand the importance from a financial standpoint of debt coverage and systemic reduction to de-risk the balance sheet. But given the strong fourth quarter and full-year performance, I would have expected a portion of funds raised to go toward business development and innovation.
After all, MU considers itself one of the foremost semiconductor companies, especially as it applies to memory tech. And these are areas where competitors are always neck and neck barring tech breakthroughs. So even if a minority of the offering would be put toward this crucial area, I would be more comfortable taking the dilution, if I were a shareholder.
In all fairness, $1.2 billion is just 2.5% of Micron’s $48-billion market cap. But knowing the importance of capital allocation in a company’s future and survival when times are not necessarily as buoyant, I have reason to question management’s judgment.
Ultimately, is this the savviest use of proceeds? Bankers are always there to advise on market conditions and timing of an offering, whether it’s debt or equity, but it’s up to the C-suite to decide how best to use the money in building the best business possible. I’m not convinced.
Micron Earnings Context
Let’s then give some context in light of the full-year data. The business is clearly growing by leaps and bounds.
For the fourth quarter, revenues jumped 91% year-over-year to $6.4 billion, and a net income of $2.4 billion means $1.99 per diluted share in earnings. For the full year, MU stock generated revenues of over $20 billion, representing a 64% increase YOY.
Micron’s memory products are selling like hotcakes, and demand is driving simultaneous price and volume increases, a boon for revenues. According to the company, DRAM sales volume was 5 percent higher, and NAND sales volume was 3 percent higher. DRAM and NAND average selling prices for the quarter increased 8 percent and 5 percent, respectively.
There’s been margin improvement as well, and MU stock rounded the year out with net income of $5.1 billion. That translates to $4.41 per diluted share. And with the MU stock price trading at around $41.63 per share, the implied trailing multiple is a reasonable 9.4x.
So while the business accelerates, accompanied by increases in cash flow from operations of $8.1 billion (up from $3.2 billion for the prior year), my only question is around management and capital allocation. It takes more than a good product to build a durable moat. They’ve developed great products and solutions, but can they turn MU into a truly great company?
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
