Micron Technology (NASDAQ:MU) opened Jan. 14 at about $35 per share. During its 2018 fiscal year, which ended in August, Micron earned $12.27 per share, and in the November quarter it earned another $2.80 per share. That means its price earnings ratio, the price of Micron stock over its earnings per share, is under three.
If its earnings were cut in half it would be 6. If its earnings were cut by 75% it would be 12. The current PE for the average stock in the S&P 500 is about 20.
But Micron earnings aren’t expected to be cut by 75% when it reports earnings in March. Analysts expect it to earn $1.77 per share. Keep up that pace and you’re looking at a PE of 5.5.
What’s going on?
The Memory Cycle and Micron Stock
Memory chips, which are Micron’s business, are commodities. Their price is very sensitive to changes in supply and demand. Analysts expect prices to fall 20% this year thanks in part to the busting of the crypto-mining boom, even as companies like Micron scale back expansion plans.
But scaling back is not the same thing as going broke. Micron had over $5.5 billion in cash on its books at the end of November, and long-term debt of just $3.7 billion. Its capital budget last year was $8.9 billion, but it can easily be adjusted downward, and it is being adjusted downward.
CEO Sanjay Mehotra has been through these cycles before. He co-founded SanDisk in 1988 and ran it until it was bought by rival Western Digital (NASDAQ:WDC). He has held 70 patents on memory technology. The company’s leadership is as sound as its balance sheet.
The Memory Menace
Micron does expect its business to slow and told analysts that at its December earnings day. The result was a panic, shares falling from $40 to below $30, from which they have since somewhat recovered.
The assumption of speculators is that China will destroy Micron and the other memory chip players with enormous production that overwhelms the current “super cycle” in memory, as chips replace moving hard drives in data centers and PCs. Memory chips are at Memory chips are at the heart of the current U.S.-China trade war.
The Super Cycle and Micron Stock
The fact is that memory chips, and chips in general, are still in a “super cycle,” which is what we say when new markets are developed.
In this case, it’s the automation of just about everything, from factories to warehouses to planes, trains and automobiles. Sensors and memory chips, linked to wireless networks, can replace expensive service calls with routine maintenance, creating efficiency in the supply chain and new demand for convenience from consumers.
Growth in cloud is still averaging 32% per year, and even conventional data centers aren’t disappearing. Demand there is growing at 13% per year.
The Bottom Line on Micron Stock
Fear in the memory market is overdone, and this is making Micron stock a bargain. This realization has sent it up 20% off those December lows.
Of 34 analysts following Micron stock, 20 still have it on their buy lists, and only two have dropped to the “hold” category even as the shares are down 15% over the last three months.
Sometimes when a stock looks cheap it’s because there’s a fundamental problem with it. Sometimes it’s because of raw fear, a buying opportunity. If you can hold Micron shares for a few years this looks to be the latter.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.