Micron Is a Great Bargain at Current Prices

Like most of the tech industry, Micron Technology (NASDAQ:MU) had a positive stock performance in 2021. MU stock mirrored the performance of the S&P 500 Index as measured by the SPDR S&P 500 ETF Trust  (NYSEARCA:SPY), gaining 26.1% in 2021 to $93.15 per share, whereas the index advanced slightly more, up 27% over the year.

Micron (MU) logo on a mobile phone that's on a table

Source: Piotr Swat / Shutterstock.com

The first month of 2022 was less exciting for the semiconductor’s stock price though. The company has dropped by 11.7% to $82.27 per share, significantly underperforming the broader market that has managed to limit its decline to 7.4%, year-to-date.

And therein lies the opportunity.

MU Stock Offers Attractive Growth, High Net Margins

In the past four quarters, Micron has beaten earnings per share and revenue analyst estimates. The company benefitted from long-term investments in its memory and storage output options and a tight chip market, enabling it to raise prices.

Despite beating the consensus of analysts in the first quarter of 2022, MU’s net sales decreased 7% quarter-over-quarter to $7.68 billion but surged 33.1% year-over-year. Besides, in the second quarter of 2022, revenues are forecasted to continue to decline, down 2.2% QoQ to $7.52 billion.

As expected, the deceleration of MU’s quarterly top line will hurt net income and margins. Indeed, while net profit decreased 15.2% in Q1 2022 to $2.3 billion, it is forecasted to reach $2.08 billion in Q2 2022, corresponding to net margins of respectively 30% and 27.8% per year.

It’s also worth noting the company boasts low debt levels.

Disruptions Continue, But Valuation Remains Cheap

On Dec. 29, 2021, MU announced that one of its main dynamic random access memory (DRAM) manufacturing facilities would incur operating delays, following the coronavirus outbreak in the city of Xi’an, China.

The lockdown, which has led to a reduction in the workforce at its manufacturing site and lasted for nearly a month (Dec. 23 – Jan. 21), will most probably weigh on MU’s short-term profitability and hence on its Q2 2022 financials.   

However, with the 15% price correction, Micron’s trades at 2022 P/E of 9.58x and EV/EBITDA of 4.71x. These valuation metrics remain cheap for a company with a net margin of nearly 30% per year.

In 2021, Micron reinstated its dividend, declaring a quarterly dividend of 10 cents per share, representing a yield of 0.52% per year, which is not enormous but indicates the management’s strong confidence in future operating activities. 

In the meantime, Intel (NASDAQ:INTC) provides a yield of 3% per year, but it is currently exchanging at 2022 P/E of 16.8x and EV/EBITDA of 7.16x and offers a net margin that’s roughly half of Micron’s, expected at only 16.3% in 2022.

On the other hand, the valuation metrics of Taiwan Semiconductor (NYSE:TSM), the leading player in the semiconductor space, are the most stretched, with a 2022 P/E of 27.9x and an EV/EBITDA of 15.1x.

Micron’s Buybacks and Growth Markets Make it a Buy

The storage chipmaker is poised for secular growth. The development and adoption of long-term trends such as 5G, artificial intelligence, quantum computing, and electric vehicle are powerful catalysts, that will drive higher demand for memory and storage chips.

Apart from the broad range of applications of Micron’s chips, the global markets of the company’s two main products, the DRAM and NAND flash memory, are forecasted to grow healthily until 2026, with a Compound Annual Growth Rate of respectively 8.5% and 22%.

In addition, the company’s share buyback program continues to provide support for MU stock, even if Micron announced the repurchase of nearly 3.6 million shares for $259 million in the 1Q 2022. That’s nearly four times less than the $1.05 billion or 13.9 million shares repurchased in the 4Q 2021. 

Nevertheless, the continued buybacks are a constructive signal for investors who seek to enter a leader in storage and chip technology.

With that being said, MU stock looks like a bargain at its current valuation. Nevertheless, the share might continue to witness selling pressure in the short term, due to surging equity market volatility. But Micron is a well-managed company with a low level of debt that is currently a bargain in terms of valuation multiples. Therefore, I have a long outlook on Micron and I believe that in the long run, the company will outperform most of the semiconductor industry.

On the date of publication, Cristian Docan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Cristian Docan, a contributor for InvestorPlace.com, has been writing stock market-related articles for Seeking Alpha, Stocknews, and Wealthpop since 2017. He takes a fundamental and technical approach in evaluating stocks for readers, focusing on momentum investing and macro-driven strategies. 

Article printed from InvestorPlace Media, https://investorplace.com/2022/02/mu-stock-a-great-bargain-at-current-market-capitalization/.

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