Micron (NASDAQ:MU) stock has traded sideways since my last article on MU. On July 22, MU stock traded around $47 per share. MU took a dip in early August, before rebounding to its current price of nearly $49 per share.
With NAND and DRAM chip prices expected to climb, could Micron stock be turning a corner? MU continues to trade at a low valuation. Investors expect its earnings to continue to drop. But an improving macro environment could be just the ticket to drive Micron stock higher.
Let’s take a closer look at MU stock and see if it’s worth buying today.
Higher Chip Prices Are a Good Sign for MU Stock
The memory-chip space may be at the dawn of a turnaround. Analysts anticipate better futures for both Micron and its rival, Western Digital (NASDAQ:WDC). Deutsche Bank analyst Sidney Ho raised his price target on MU stock to $55 per share. He believes the market for DRAM could improve further, going into the upcoming fiscal year.
Another analyst, Mizuho’s Vijay Rakesh, also is also bullish on Micron stock. He raised his price target on MU to $50 per share. Rakesh pointed out that NAND chip prices have improved since July. He believes Micron could beat average estimates when it announces its earnings on Sept. 26.
Other news crumbs point to a memory-chip rebound. Memory-module supplier Adata Technology sees DRAM prices rebounding in the short-term, primarily due to seasonal demand. As the holiday season approaches, smartphone makers are ramping up production. But is this short-term trend the start of something big? Also important to consider is a looming, potential recession. And of course, there is still the U.S.-China trade war to contend with.
Investors feared the Hong Kong protests would cause the trade war to deteriorate further. But with things cooling off, shares have rallied. However, we aren’t out of the woods just yet. With both countries wanting to “win” the battle, it could be a long time before a deal is made.
And MU is highly levered to China, particularly Chinese smartphone maker Huawei. China represents 50% of Micron’s business. 17% of its revenue comes from Huawei, which is caught in the cross hairs of the trade conflict.
As a result of these factors, Micron stock trades a at low valuation relative to the market. But is this discount justified? Let’s take a closer look at the valuation of MU stock.
Compared to Peers, Micron Is Cheap
Micron stock trades at a forward price/earnings ratio of 9.1. The company’s enterprise value/EBITDA (EV/EBITDA) ratio is 3.3. Compare that to Western Digital. The latter company has a forward P/E of 21.5. It has an EV/EBITDA ratio of 12.3. While Western Digital is somewhat different from Micron (WDC does not sell DRAM), both companies have similar macro headwinds. WDC is priced for a turnaround. But MU stock remains priced for a worst-case scenario.
MU is also materially cheaper than other types of semiconductor stocks. AMD (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA), which both swell graphics processing units, trade at significantly higher forward P/E and EV/EBITDA ratios. They have higher valuations than MU stock even though they are also getting hit with supply gluts and sales declines. But MU is a more cyclical company, and demand for GPUs is increasing more rapidly than demand for Micron’s chips.
However, the boom-and-bust nature of Micron stock could create opportunity. Investors can buy Micron stock at the bottom of the cycle and sell it when its results beat expectations.
MU Is a Solid Short Term Bet, If Nothing Else
At first glance, MU stock looks like a value trap.. But the DRAM and NAND markets could rebound. With an improved demand picture, investors could drive Micron stock higher. However, there are many caveats to this play. The U.S.-China trade war could accelerate. The rumored recession could finally emerge.
Another caveat is that MU stock is likely not worth holding over the long-term. MU is a classic cyclical play. Investors should buy it when NAND and DRAM are down, and sell it when market demand picks up. But that’s easier said than done.
Lacking the growth potential of more specialized chip names, MU is likely not a stock that’s going to double, triple, or quadruple. However, for contrarian investors, Micron stock may just be the play. A better entry point could emerge after its recent rally dissipates. MU stock is worth watching.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.