Micron Technology, Inc: Why This Chip Stock Could Double

Micron
iStock.com/ysuel

Micron Stock’s Weakness Paves Way to Higher Return 

One of my favorite large-cap chip stocks with above-average return prospects is Micron Technology, Inc. (NASDAQ:MU).

The trade war with China has put pressure on many of the companies that sell key technologies to Chinese companies.

But my sense is that these are temporary issues, which will eventually be worked out. There is simply little chance that technology companies can be shut out of the massive and growing Chinese technology market.

That said, Micron stock has been under pressure, down 12% over the past month and down 31% from the record high of $64.66 in May 2018.

Advertisement

Chart courtesy of StockCharts.com

On a year-to-date basis, MU stock has easily outperformed both the Nasdaq and S&P 500, with a 40.4% gain.

Micron Technology, Inc. is a “best of breed” player in the manufacturing of memory solutions, such as its high-performance solid state drives (SSDs), dynamic random access memory (DRAM), NAND flash memory, NOR flash memory, hybrid memory cubes, multi-chip packages, and memory cards.

Why MU Stock Will Recover

After a revenue decline in fiscal 2016, Micron came back with growth in fiscal 2017 and fiscal 2018, prior to a decline in fiscal 2019.

Fiscal Year Revenues (Billions) Growth
2015 $16.2
2016 $12.4 -23.4%
2017 $20.3 63.9%
2018 $30.4 49.6%
2019 $23.4 -23%

(Source: “Micron Technology Inc.MarketWatch, last accessed October 11, 2019.)

Micron’s revenue contraction is expected to continue in fiscal 2020, with revenues declining by an estimated 11.4% to a consensus $20.7 billion. The high estimate is $24.0 billion.

For fiscal 2021, Micron is slated to ramp up its revenues by 21% to $25.1 billion, with a high estimate of $30.6 billion. This is up 47.6% from the fiscal 2020 consensus. (Source: “Micron Technology, Inc. (MU),” Yahoo! Finance, last accessed October 11, 2019.)

Micron produced positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in the last five straight years, including strong growth in fiscal 2017 and fiscal 2018.

Fiscal Year EBITDA (Billions) Growth
2015 $5.6
2016 $3.2 -42.9%
2017 $9.7 203.6%
2018 $19.7 102.2%
2019 $12.9 -34.5%

(Source: MarketWatch, op. cit.)

As far as profitability goes, MU has largely been delivering earnings-per-share (EPS) profits on a generally accepted accounting principles (GAAP) and adjusted basis.

Fiscal Year EPS Growth
2015 $2.47
2016 -$0.27 -111.9%
2017 $4.41 1,733%
2018 $11.50 160.8%
2019 $5.67 -50.7%

(Source: MarketWatch, op. cit.)

A positive is that Micron’s EPS trend has been moving higher over the past 90 days.

But the company is estimated to report adjusted earnings per diluted share of $2.54 in fiscal 2020, down from $6.35 in fiscal 2019. Micron is expected to ramp up its earnings to a consensus $5.34, or as high as $8.75, per diluted share in fiscal 2020. (Source: Yahoo! Finance, op. cit.)

Micron delivered positive free cash flow (FCF) in each of the last five years, with the exception of fiscal 2016. The positive FCF will allow for capital expenditures.

Fiscal Year FCF (Billions) Growth
2015 $1.2
2016 -$2.6 -323.2%
2017 $3.4 229.1%
2018 $8.5 149.2%
2019 $3.3 -60.9%

(Source: MarketWatch, op. cit.)

Analyst Take

Micron stock trades at a cheap 5.1 times its high EPS estimate for fiscal 2021. This valuation is cheap by any standard.

Progress in the China trade situation, especially with technology companies, should give an immediate boost to MU stock. In the meantime, investors might want to take the current opportunity to accumulate shares of Micron Technology, Inc. on weakness.