With Micron (NASDAQ:MU) stock just off its 52-week high, is now a good time to buy MU stock? Micron’s shares are climbing because of the belief that 5G will raise demand for its products. But in a reversal from past months, the shares may be getting ahead of themselves.
No longer “priced for disaster, ” Micron stock, trading at around $57.50 per share. prices in much of the company’s “5G catalyst.” But, as long as the company meets or exceeds average earnings estimates during its next fiscal year, the shares could easily reach the price targets set by analysts of around $70.
Unlike when MU stock was under $40 per share, MU is not a screaming buy. The small gains remaining may not justify buying the shares at today’s prices. But if you already own MU stock, there could be some value left on the table.
Why 5G (and Other Catalysts) Could Send MU Stock Even Higher
As InvestorPlace’s Ian Cooper previously discussed, 5G devices require both DRAM and NAND memory. Not only that, but 5G devices require 50% more memory than the current generation of smartphones. All of that has helped boost MU stock.
But this “5G catalyst” may not be entirely priced into the shares. Some analysts are extremely bullish on Micron’s potential gains. Susquehanna Financial Group’s Mehdi Hosseini gave MU stock an $85 per share price target back in December. While the analyst’s FY20 earnings forecast is below the average of his peers, he believes Micron’s results starting in the second half of 2020 will substantially beat mean estimates.
But, on a positive note, 5G isn’t the only catalyst for Micron’s shares. In December, Barron’s interviewed Micron Chief Business Officer Sumit Sadana. In the interview, Sadana reported that 5G was raising demand for MU’s chips. But he also discussed improved DRAM and NAND demand in other markets. Specifically, cloud computing servers are now using increased amount of DRAM and NAND. Data centers are also pivoting from disk drives to solid state drives.
These factors could enable Micron to exceed earnings expectations in FY21, helping to move MU stock well above its current levels. But given the cyclical nature of its business, Micron’s earnings multiple probably won’t rise much. Let’s take a look at the valuation of MU stock and see how it stacks up historically.
Why the Valuation of Micron Stock Can’t Climb Much
Micron’s “boom and bust” nature means its shares will never reach the valuation of AMD (NASDAQ:AMD) or Nvidia (NASDAQ:NVDA). The forward price-earnings (P/E) ratio of MU stock, based on its expected EPS for its current fiscal year which ends in August, is 25.8. But Micron’s earnings are not expected to take off until July.
The forward P/E based on analysts’ average FY21 estimate is 10.6, which is quite cheap. But it’s important to remember that, although the company may do well during the 2020-21 5G bonanza, it won’t report such strong results in subsequent years.
FY18 was a banner year for Micron stock. The company’s EPS was $11.51. In the following fiscal years, though, demand weakened, pushing its earnings substantially lower.
So what is an appropriate valuation for Micron? During the company’s last boom cycle, the shares traded at a P/E ratio of between 4.6 and 6.7. In other words, Micron may need to hit the high end of analysts’ FY21 earnings estimates, i.e. EPS of around $1o, just to sustain its current valuation.
That may happen in the “year of 5G”. But things get more uncertain after that. With this in mind, it may be tough for Micron stock to rise above analysts’ recent price targets of $70.
The Bottom Line on Micron Stock
On paper, Micron stock looks very cheap relative to its semiconductor peers. But considering the company’s “boom and bust” dynamics, the shares could be trading at their fair value. On the other hand, if DRAM and NAND demand is even higher than anticipated, investors could bid up the shares to a valuation above what was seen in the last boom year.
If you already own MU stock, don’t sell your shares now because they could climb further. Those looking to buy the stock today, though, may be too late for the party.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.