Why David Einhorn Is Wrong on Micron Stock
Billionaire hedge fund manager David Einhorn has been losing big on the market for his wrong bets, one of which is Micron Technology, Inc. (NASDAQ:MU). MU stock has lost more than 57% of its value this year and Einhorn is now slashing his stake in the company.
Normally, this is something that should worry shareholders, but should MU stock investors start running towards the exits? Definitely not!
Micron was one of Einhorn’s top four bets this year, until he decided to slash a major portion of his holding in MU stock. Likewise, many others on Wall Street are dumping the company’s shares. Micron has close to 83% of its outstanding shares held by institutions, so it is understandable that the stock got hammered, as large stakes were unloaded.
Primarily, the traders sold off their shares after negative commentary repeatedly made rounds that the company was losing money on its core business of DRAMs. But there’s more to Micron that Mr. Market fails to see.
Agreeably, Micron’s primary source of revenue is its DRAMs, or hard drives, that are seeing a decline in demand due to dwindling demand in the wider PC market. With smartphones, tablets, and phablets taking over the world, demand for standard laptops and desktops has slid. Nonetheless, the demand hasn’t failed to exist.
What the bears overlook is that DRAMs are not the only product Micron offers. Its 3D NAND flash drives, which are the faster alternative to its DRAM, are a promising product. In addition, the 3D Xpoint memory that is 1,000 times faster than the standard NAND, created in partnership with Intel, is another venture that has promising revenue potential for the company. Companies like Apple are posting strong demand for Micron’s NAND in their handheld devices.
Additionally, Micron’s management is working to create utility beyond just memory storage for its semiconductor chips. Micron’s “Automata” processor, touted as the next big breakthrough in the memory storage and processing industry, is finally being rolled out to developers. (Source: “Micron Exposes the Double Life of Memory with Automata Processor,” HPC Wire, November 22, 2015.) The chip can process complex data for very high-speed searches and deliver analysis on it. Simply put, you can process huge chunks of data concurrently, unlike standard CPUs that process data sequentially.
The chip has great potential in the security industry, especially the government sector, where it can help in image processing, and network security. The chip also finds utility in bioinformatics and may assist in genetic decoding and other forms of data-intensive biotechnology.
The growing phenomenon of the “Internet of Things” (IoT) will further lend to the company’s success. As machines connect with other machines through wireless networking, it will become imperative to demand both speed and security. Micron chips will provide both.
The Bottom Line on MU Stock
Micron is financially strong, with a solid cash position, manageable debt, and steady cash flow. Compared to its peers like Western Digital Corporation and SanDisk, Micron offers the best return on equity at a handsome 23%.
The company’s management team has hinted that its quarter-by-quarter results may waver, but the company’s focus is on the long-term. In addition to introducing new and improved memory storage technologies, Micron’s management is also looking for ways to find value for DRAMs beyond just PCs.
In a nutshell, MU stock looks like a bargain at its current lows.