Sundry Photography/iStock Editorial via Getty Images
Micron Technology, Inc. (NASDAQ:MU) held its investor conference recently and management presented insights into its long-term model. It also discussed its transition from mobile and PC into the higher-margin data center, automotive, and industrial segments.
We think Micron has presented a credible thesis that it can execute confidently while maintaining reasonable expectations. While we remain confident about Micron’s strategy, we are still cautious about the industry’s inherent volatility. Management has telegraphed its move toward longer-term agreements (LTAs) to mitigate the volatile price swings resulting from seasonal cycle dynamics.
Investors should note that such price swings have significantly impacted the memory leaders’ profitability in the past. As a result, the market remains cautious in re-rating the memory makers’ valuation in line with the semi-industry mean. In other words, Micron and its leading memory peers, SK Hynix and Samsung (OTC:SSNLF), are cheap for a reason. Therefore, we believe that the market will continue to ascribe lower valuation multiples to MU until it’s convinced that their LTAs have proven significant to sustain their margins through the up and downcycle.
We also note that MU stock has continued to face selling pressure at the two significant bull trap levels at around $100. Therefore, we reduce our price target to $80 (implied upside of 11.2%). We noted that MU stock could continue to face selling pressure if it could not maintain its current support level. As a result, MU stock could face a potential downside of 20% to 35.7%. Notably, we also have not observed any bear trap that could potentially strengthen the buy point at the current support level.
Consequently, we revise our rating on MU stock from Buy to Hold, given the less attractive risk/reward profile due to our PT downgrade.
Micron presented its long-term model at its recent conference, which was helpful and corroborated our views that MU margins could be peaking in the near term. Micron presented a long-run revenue growth rate in the high single digits, as it expects to outpace the industry’s growth. Micron posted LTM revenue growth of 24.9% in FQ2. Therefore, investors should factor in a potential topline growth deceleration moving forward. We believe the significant exposure to the slowing PC and mobile market could continue to be a substantial headwind for its revenue growth as it exits FY22.
Notably, Micron’s PC and mobile segments accounted for 55% of its CY21 revenue. Management estimates PC and mobile’s revenue share to decline to 38% by CY25. However, it implies that Micron’s revenue remains highly susceptible to the current PC and mobile headwinds for CY22.
Micron LTM FCF margins % (S&P Capital IQ)
Micron LTM gross margins % and EBIT margins % (S&P Capital IQ)
Furthermore, the significant volatility in Micron’s profitability and FCF margins has continued to spook investors. Analysts also sought management’s guidance on the profitability guidance of its long-term model. They also wanted to know whether Micron could potentially head back to the higher margins days of 2018. However, CEO Sanjay Mehrotra was reticent in providing additional color. Instead, he emphasized (edited):
So we have projected cross-cycle margins. We are not projecting peak or trough. And the point again is with less volatility, there will be greater stability in the industry as well. (Micron’s 2022 Investor Day)
Notably, Micron guided for long-term operating margins of 30% and FCF margins of more than 10%. If we consider Micron’s LTM EBIT margin of 33.6% and FCF margin of 15.6% in FQ2, bearish Micron investors could argue that Micron’s near-term profitability could have peaked. But, of course, unless Micron could achieve significant operating leverage gains from much higher revenue growth or significant cost mitigations.
Micron consensus estimates % (S&P Capital IQ)
Furthermore, we think the consensus estimates on its revenue growth could be too optimistic as Micron exits FY22. The Street’s average estimates suggest a 20.8% YoY revenue growth in FY23. However, the most conservative estimates were much less sanguine. They indicate that Micron could suffer a YoY revenue decline of about 4.5% in FY23. Notwithstanding, we believe these projections could be too pessimistic, given the company’s exposure to secular growth drivers in automotive, industrial, and data centers.
However, the continued weakness in the PC and mobile market could be more significant than estimated. Given Micron’s current exposure, and its current estimates, we believe a de-rating could occur. Therefore, we encourage investors to continue monitoring the PC and mobile market trends carefully moving forward.
MU stock price chart (TradingView)
MU stock price chart (monthly) (TradingView)
MU stock had two significant bull traps at the $100 level. Therefore, investors are urged to avoid adding anywhere near that level. If possible, they should loosen their exposure if MU stock goes toward that level subsequently. As a result, we cut our PT to $80, which is MU stock’s most recent resistance level.
Furthermore, we believe that the market is still digesting its massive gains from 2020, as it drew in the buyers rapidly. The enormous bull traps at $100 corroborated our thesis that MU stock would continue to face near-term headwinds. As the stock last traded at its critical support level of $65, selling now would not be reasonable.
Therefore, we urge investors considering adding exposure to wait for a re-test of its current support level. We believe that MU stock could face a potential downside of between 20-35.7% if the market makers decide to digest its gains further. Also, note that MU stock has already broken well above its 2018 highs, even though its profitability is nowhere near those levels. Therefore, it looks increasingly likely that MU stock has likely priced in its optimism.
MU stock NTM FCF yields % (TIKR)
MU stock last traded at an NTM FCF yield of 9.5% (Vs. 5Y mean of 9.12%). It’s also more attractive than its memory peers SK Hynix (KRX: A000660) and Samsung stock (KRX: A0005930).
However, we explained previously that the re-rating in MU stock is unlikely in the near term given its volatile margins profile. The market must be convinced that the industry profitability can improve dramatically moving forward. Otherwise, MU stock valuation is likely to stay lower than the semi-industry average.
We revise our rating on MU stock from Buy to Hold with a PT of $80. We are not bearish on MU stock. But, with an implied upside of 11% and a potential downside of 20-36%, we think the risk/reward profile is tilted to the downside. Consequently, we encourage investors to wait for a better buy point before adding exposure.
We help you to pick lower-risk entry points, ensuring you are able to capitalize on them with a higher probability of success and profit on their next wave up. Your membership also includes:
24/7 access to our model portfolios
Daily Tactical Market Analysis to sharpen your market awareness and avoid the emotional rollercoaster
Access to all our top stocks and earnings ideas
Access to all our charts with specific entry points
Real-time chatroom support
Real-time buy/sell/hedge alerts
Sign up now for a Risk-Free 14-Day free trial!
This article was written by
I’m Jere Wang, the principal analyst and founder of JR Research and Ultimate Growth Investing Marketplace service.
Ultimate Growth Investing is curated to help investors achieve 5x to 10x returns over the next five years.
As a growth-oriented investor myself, I am aware of the challenges investors face in their quest to find the right growth stocks. There are so many high-potential companies in the market. As these are emerging leaders, the due diligence required is even more crucial. All growth investors want multi-bagger returns. Unfortunately, most could hardly find the time to do the necessary work.
Therefore, our service is here to help these investors. We are full-time investors and traders. We work day-in, day-out to find the best opportunities for ourselves. Now, we are extending those opportunities to these investors through the service.
If you also prefer someone to do all the hard work for you, I invite you to try out our service.
Subscribe right now because you get to try out the service for 14 days FREE. Seeking Alpha’s unconditional guarantee also protects your free trial.
Your billing only starts after the free trial. So there’s absolutely no risk at all for you to subscribe. Upon subscription, you will have access to all of our investing resources. You will also have access to our Growth Portfolio.
Come and join our community of investors as we navigate the ups and down of the market together. All our best ideas are shared only with our community in the service. Hence, you will not be able to find them on the free site.
If you have any questions, feel free to send me a direct message. I’m here to help.
I look forward to connecting with you in Ultimate Growth Investing soon!
More About Me:
I was already a full-time investor and trader before I joined Seeking Alpha as a contributor. I enjoy sharing my experience, knowledge, and mistakes with fellow investors who don’t have time to look at the market. It is not a part-time job that I do on the side. I depend on what I do for a living. I take these responsibilities very seriously.
I was previously an Executive Director with a global financial services corporation. I graduated with an Economics Degree from National University of Singapore [NUS]. NUS is Asia’s #1 university according to Quacquarelli Symonds [QS] annual higher education ranking. It also held the #11 position in QS World University Rankings 2022.
I’m also a Commissioned Officer (Reservist) with the Singapore Armed Forces. I’m the Battalion Second-in-command of an Armored Regiment. I currently hold the rank of Major.
I love spending time researching high-quality growth companies. That also includes investing time analyzing their price action. In addition, it has allowed me to develop a clear understanding of how institutional investors play their game.
Our best research ideas in the service are highly actionable. We own our best ideas and have skin in the game. Our ideas are not just designed to be a good read. Therefore you wouldn’t get abstract theories or concepts from us. You will only get timely and actionable ideas. These are also high probability and workable set-ups with lower-risk entry points.
My LinkedIn: https://www.linkedin.com/in/jjere/
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
