Since June 2018, Micron Technology (NASDAQ:MU) has done the unthinkable after reporting incredibly strong revenue: Micron stock topped off at over $60 but it has since bottomed out at $35.
It took a stock market rally for a few consecutive days to get the stock back to $40. Stock price movement aside, markets did have it right when it priced in lower memory and flash NAND prices. It also correctly factored in the risks of a trade war between the U.S. and China on its profits. As MU shares trade at a valuation of 3.55 times earnings, what is Micron’s fair value?
In September, CEO Sanjay Mehrotra said profits would suffer from U.S. tariffs imposed on Chinese imports. The impact on profits is minimal at 50 to 100 bps, yet the market priced in a worse scenario. By late October, MU stock fell to as low as $33.82 before recovering by the end of the week. It closed recently at $40.32 when technology stocks and the markets rebounded.
Micron has no control over how the trade war plays out. The United States Department of Justice took a proactive initiative against Taiwan-based United Microelectronics (NYSE:UMC) and Chinese State-owned Fujian Jinhua Integrated Circuit, plus three individuals. The government contends that they conspired to steal MU’s trade secrets. The action represents changes in America’s tolerance for IP theft, as the country is no longer letting China take IP without compensating firms.
Micron Stock and Falling Chip Prices
Although the move helps Micron, the chip giant has other macro headwinds ahead. As Western Digital Corporation (NASDAQ:WDC) reported in its quarterly earnings report, NAND prices are falling and demand is weakening. WDC is cutting supply and taking a charge. This is consistent with MU’s warning on profits for the quarter, although for a different reason. MU cites the trade war as the reason profits will fall. WDC is facing weaker sales. If there is a glut in NAND-based storage, both companies will trade at depressed valuations.
Another scenario is that WDC’s products do not compete effectively against Micron’s Crucial SSD product. So if WDC has company-specific issues and the trade war is resolved, Micron stock could rebound in a hurry.
Micron Buys Out Intel JV
On Oct. 19, Micron announced it would buy out
Intel Corporation’s (NASDAQ:INTC) interest in the IM Flash joint venture. Micron will get the Utah manufacturing facility for 3D XPoint; IM Flash Technologies or “IMFT” is a joint venture that was established with Intel in 2006. The original task of the joint venture was manufacturing NAND flash memory. Today, the JV exclusively manufactures 3D XPoint product. Micron’s buyout accelerates the commercialization of 3D XPoint. It allows the firm to pursue its own line of emerging memory products. After the deal closes, Micron will still manufacture 3D XPoint wafers to Intel on a foundry basis.
Micron still expects to meet its previous timeline: 3D XPoint products will come to market in late-2019. Revenue will ramp up in calendar year 2020. MU will pay Intel $1.5 billion. After the transaction closes, MU still forecasts capital expenditures of $10.5 billion +/- 5% in fiscal 2019.
MU’s Stronger Moat From Deal
Micron scored a good deal in buying out Intel’s ownership. It gets 100% ownership of the only 3D XPoint manufacturing facility in the world. Moreover, it has a supply agreement already in place, and the timing of the deal will work out in the long-run. Intel has little interest in selling NAND-based products. It probably could have paired its Intel SSD drives with its CPU solution but decided instead to focus only on the CPU market. As competition worsens for Intel, thanks to Advanced Micro Devices (NASDAQ:AMD) launching Ryzen, Intel needed to put its focus back on the CPU market.
Bottom Line on MU Stock
Micron had deep value at $60 a share and even better value at today’s prices. Markets priced in trade war disruptions, lower sales in DRAM and NAND due to lower demand and gave the firm no credit from the JV buyout. With MU stock trading below the analyst average price target of $65, if and when chip demand rebounds, MU stock might get to that target soon.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities, but may buy Micron or Intel stock within the next 72 hours.
