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Micron Stock Is Bound to Bounce Back as Chip Demand Recovers

Micron stock is undervalued based on earnings prospects

Micron (NASDAQ:MU) is poised for a major recovery later this year as an economic recovery takes hold, making Micron stock worth another look.

According to Prevailing Trends, MU Stock Remains Undervalued
Source: Piotr Swat / Shutterstock.com

Micron’s technology is a fundamental part of any rebound since it is one of the world’s top memory chip makers.

Its DRAM memory chips, 64% of sales, and NAND chips, 32% of sales, are used in PCs, data centers, and other devices.

As a result, there is a clear correlation between economic growth and the demand for and pricing of memory chips. For example, Barron’s cited a report from Wedbush analyst Matt Bryson that demand will flatten out for memory chips through the end of this year.

Moreover, he says that buyers will have access to many other suppliers and this will hurt memory chip pricing.

The Turnaround and Micron Stock

Micron made non-GAAP net income of $941 million in its Q3 ended May 28 or 82 cents per share. This was well above both the prior quarter and year-ago results.

However, due to prior quarter losses, Micron’s earnings are still well below last year. For example, its 9 month GAAP results were $1.50 earnings per share (EPS) vs. last year’s $5.01 EPS.

Wedbush’s Bryson noted that the quarter had a small decline in memory pricing. But he was worried that this will continue through the present quarter and later in the year. However, he thinks demand will eventually come back strong.

For example, he feels that device upgrades and advances in enterprise hardware and technology as well as in gaming consoles will fuel demand for more memory chips. This will underpin Micron’s revenue growth.

This seems to be borne out in other analysts’ estimates for Micron. Seeking Alpha‘s poll of 31 analysts expect 2020 EPS to be $2.47. This is well below last year but includes a rebound in the final quarter ending August.

More importantly, though, these analysts expect earnings to rebound dramatically in its fiscal 2021 to $4.57. This is close to the company’s historical earnings power. For example, in 2019 the company made $5.51 per share.

Moreover, at today’s price (July 7) for Micron stock, just under $50, that puts it on a cheap 11 times earnings. This is a cheap price for a very profitable technology company.

Micron Is Financially Healthy

Potential investors in Micron stock need to focus on the company’s good financial condition. For example, in the past trailing 12 months (TTM), Micron generated $297 million in free cash flow. This was despite its prior quarter having negative free cash flow.

Moreover, the company has over $2.6 billion in net cash, after deducting all of its long-term debt. That still represents 4.4% of Micron’s market value at today’s price just under $50.

In fact, the company has a strong enough condition that it continued its share buybacks in the last quarter. It bought back 929,000 shares at an average price of $40, well below today’s price.

This $37 million in buybacks is a form of capital return to existing shareholders. I have pointed out in other articles on how buybacks benefit existing investors in a company.

What Investors Should Do With Micron Stock

Morningstar has a report on its site that shows the average P/E ratio over the past five years for Micron is 13.95 times earnings. Given that Micron stock’s 2021 forward P/E ratio is 11 times, this shows that the stock is cheap.

For example, using the 2021 earnings estimate of $4.57 per share and multiplying it by 13.95 yields a target price of $63.75. Since that is two years out we can discount it by 10% per year. That represents a potential gain of $14.70 over today’s price of $49.05 per share. In other words, the potential upside is 30% over two years.

For most investors that is a decent return on investment. However, keep in mind that there will be volatility to this return. If earnings do not measure up, the stock may not reflect this expected return.

But for the patient investor, this looks like a good trade-off between potential risk and return.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/micron-stock-rebound-chip-demand-recovery/.

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