Even with a nearly 5% jump in Wednesday’s trading, Micron Technology, Inc. (NASDAQ:MU) has had a relatively quiet couple of weeks. MU stock soared in October and November, tanked in December, but has settled in so far in 2018.
It’s not as if there’s been no news. Fourth-quarter earnings on Dec. 19 looked reasonably strong. Supply/demand balance is also strong, according to both a KeyBanc analyst and Micron’s own CFO. On the other hand, the end of a deal with Intel Corporation (NASDAQ:INTC) sent MU stock lower earlier this month. And a patent case in China has cast a shadow over Micron stock, as Josh Enomoto detailed a couple of weeks ago.
As far as MU goes, the good news and bad news have offset one another so far. But I expect that to change. And I expect Micron stock to grind higher as 2018 rolls on.
Memory Prices Are Stable
The key reason that Micron stock trades at just 5 times fiscal year 2019 earnings-per-share estimates — 5x! — is that investors believe the company is at or near a cyclical peak. As I wrote back in June, the market has seen this story with MU before. Between early 2013 and late 2014, Micron stock rose from under $5 to over $35. Within 18 months, it was back in single digits.
MU is a cyclical stock — maybe the most cyclical stock in the market. Even Caterpillar Inc. (NYSE:CAT), the textbook example of a cyclical industrial, hasn’t dipped into the red on a non-GAAP basis. And so an investor can’t simply take trailing twelve-month non-GAAP EPS of $7.10, apply a 15 or 20 multiple, and assume Micron stock is worth $105-$140. Earnings are going to come down at some point.
The question is when — and by how much? That’s why the loss of the Intel deal was seen as bearish: it adds another potential supplier in NAND. And the history of both the DRAM and NAND industries is that, eventually, a supplier decides to build capacity and undercut on pricing. Once that happens, the industry follows, and prices and profits plummet.
That hasn’t happened yet, however — and it’s likely not to happen soon. Capacity is increasing at the three key players in DRAM: Micron, Samsung Electronics Co Ltd and SK Hynix Inc (OTCMKTS:HXSCF). But demand is soaring as well, thanks to everything from smartphones to automobiles to server needs. There’s a hope that Samsung has learned its lesson after starting the last DRAM downcycle, and demand is better and more diversified than it was when it was more dependent on the PC space (admittedly still a risk near- and long-term).
In the NAND space, the Intel deal is a concern. But Micron gets 60%+ of revenue on the DRAM side, and NAND prices have weakened only modestly. The big risk to Micron stock simply hasn’t shown up — at least yet.
Is MU Stock Cheap?
Just because prices haven’t plunged yet doesn’t mean Micron is out of the woods. But there’s enough here to support a short- and long-term case for MU stock.
In the near-term, MU simply isn’t going to give way until firm evidence of pricing pressure shows up. And, again, it hasn’t. The Street remains firmly behind the story: the average target price is almost $59, suggesting roughly 35% upside. Something big will have to change — and change relatively soon — for MU to drop.
Longer-term, the recent performance still suggests MU stock is undervalued. Rough calculations suggest that mid-cycle earnings are in the $3-$5 per share range, given modestly negative profitability that is heading to peak EPS of at least $7+. Put a mid-teens multiple on that range and MU stock is worth $45-$75. (It’s not a coincidence that consensus targets are pretty much in the middle of that range.)
Bottom Line on MU Stock
Again, there are concerns here. But this still is a stock trading at 5x forward EPS, which, by definition, prices in at least some of those concerns. And, in this case, the market appears simply too conservative. There are concerns about capacity. But long-term trends are beneficial. Micron is throwing off huge amounts of cash flow now and into the foreseeable future.
In an industry where investors are paying huge multiples for Nvidia Corporation (NASDAQ:NVDA) and chasing an ever-elusive turnaround at Advanced Micro Devices, Inc. (NASDAQ:AMD), the easiest play is being ignored at the moment.
There will be some choppiness, but MU stock still appears to have quite a bit of upside left.
As of this writing, Vince Martin has no positions in any securities mentioned.