Despite Disappointing Outlook, Micron Technology Inc. Stock Is Still Attractive

  • Micron Technology, Inc. is on track with deploying its advanced DRAM and NAND technologies and improving its cost structure.
  • The recent drop in Micron stock price creates an excellent opportunity to buy the stock at an attractive price.
  • The average target price of the top analysts is at $13.96. However, in my opinion, Micron stock price could go even higher.

Although Micron Technology (NASDAQ:MU) offered a bit of a disappointing outlook for the current quarter along its recent earnings release, in my opinion, now is an excellent opportunity to start a position in the stock with a good chance for high capital gain in the second half of 2016. Despite near-term challenging market conditions, investors should be encouraged by the fact that Micron is on track with deploying its advanced DRAM and NAND technologies and improving its cost structure. As a result, according to the company, it expects to improve significantly its competitive position in the second half of 2016 and beyond.

In DRAM, Micron has won several customer qualifications for its 20 nm DDR4 products; and the company expects its 20 nm LPDDR4 solutions to be qualified with most mobile customers by the close of the current quarter. For the current quarter, the company forecasts strong double-digit bit growth and related cost reductions in DRAM as more and more customers deploy the company's 20 nm technology. Micron is also moving forward with its 3D NAND SSDs for enterprise and client applications. According to the company, the 3D NAND ramp in manufacturing is proceeding well, and the company expects to see significant bit growth and reductions in cost-per-bit beginning in autumn 2016.

Year to date, Micron Technology Inc. stock is down 26.6% while the S&P 500 index has increased 0.1%, and the Nasdaq Composite Index has lost 3.3%. Since the beginning of 2012, Micron stock has gained 65.3%, while the S&P 500 Index has increased 62.6%, and the Nasdaq Composite Index has risen 85.9%. Nevertheless, considering its compelling valuation and its strong growth prospects, the recent drop in its price creates an excellent opportunity to buy the stock at an attractive price. According to TipRanks, the average target price of the top analysts is at $13.96, implying an upside of 34.2% from its April 5 close price. However, in my opinion, shares could go even higher.

MU stock chart

Source: Micron stock price chart by amigobulls.com

On March 30, Micron Technology, Inc. reported its second quarter fiscal 2016 financial results. Although the company suffered EPS loss of $0.05 in the quarter, it was lower than analysts' expectations for a loss of $0.08. Micron’s revenue in the quarter decreased 29.6% year-over-year to $2.93 billion missing average analysts' estimates for revenue of $3.27 billion. The company reported earnings surprise in nine of its last ten quarters, as shown in the table below.

Data: Yahoo Finance

Revenues for the second quarter were lower compared to the first quarter primarily due to approximately 10% declines in both DRAM average selling prices and sales volume. Non-Volatile trade revenues for the quarter declined 6% compared to the first quarter primarily as a result of an approximate 15% decline in average selling prices partially offset by an increase in sales volume. The company's overall consolidated gross margin of 20% for the second quarter was 5% lower compared to the previous quarter primarily due to lower average selling prices partially offset by manufacturing cost reductions for Non-Volatile products.

Micron Technology Inc. Valuation

Micron's valuation is very good; Micron stock is trading below its book value, price to book is very low at 0.88, the lowest among all 67 S&P 500 tech companies. The trailing P/E is extremely low at 5.74, and the forward P/E is also low at 12.37. The price-to-sales ratio is very low at 0.72, and the Enterprise Value/EBITDA ratio is extremely low at 3.13, the third lowest among all 67 S&P 500 tech companies. According to James P. O'Shaughnessy, the Enterprise Value/EBITDA ratio is the best-performing single value factor. In his impressive book "What Works on Wall Street," Mr. O'Shaughnessy demonstrates that 46 years back testing, from 1963 to 2009, have shown that companies with the lowest EV/EBITDA ratio have given the best return.

The ten S&P 500 tech companies with the lowest price to book value ratio:

The ten S&P 500 tech companies with the lowest EV//EBITDA ratio:

Source: Portfolio123 

Conclusion

Micron is on track with deploying its advanced DRAM and NAND technologies and improving its cost structure. As a result, we can expect the company to improve its competitive position significantly in the second half of 2016 and beyond. Micron's valuation is very good; the stock is trading below book value, and the trailing P/E is extremely low. The average target price of the top analysts is at $13.96, implying an upside of 34.2% from its April 5 close price. However, in my opinion, Micron stock price could go even higher.

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Author's Disclosures & Disclaimers:
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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