Over the last month or so, market fears and uncertainty have centered primarily around global trade. In July and August, one of the most affected pockets of the economy was the tech sector, with particular bearishness bearing down on semiconductor stocks. As measured by the iShares Semiconductor ETF (SOXX), that industry is down about 5.5% since peaking in early June. While that’s not exactly bearish trend territory for the industry, it is still reflective of the sentiment that this industry is facing a number of pressures, not all of which are centered around the Trump administration.
Semiconductors tend to be highly cyclical, and reports from analysts as well as businesses that specialize in the memory space (DRAM and NAND flash memory in particular) indicate that demand in this area exceeds supply, and is expected to continue doing so for the foreseeable future as more companies like Micron Technology, Inc. (MU), Western Digital Corp (WDC), Intel Corp (INTC) and others fight for market share. At the same time, trade concerns are warranted, as the Trump administration’s efforts to block certain technology exports, prevent Chinese companies from investing in U.S. tech companies, and protect intellectual property could add to those pressures, and I believe is one of the biggest reasons the industry has continued to lag the rest of the market.
That has created some good opportunities in a lot of different stocks; every one of the companies I just listed are significantly below their 52-week highs or have actually entered bear market territory. MU, in particular is one that seems to have borne the brunt of market pessimism; the stock is down more than 31% below its 52-week high, reached in late May as of this writing. While I’m not dismissing concerns about the company’s exposure to trade war risk, I do think that the market has oversold that likelihood in MU’s case. I’m basing that conclusion on the fact that company has an outstanding fundamental profile, with operating margins that are ahead of just about any of its peers, low and manageable debt levels, with a ton of cash that could be used in any number of different ways. including buying back shares of the company’s stock. That is a move the company announced in May of this year to the tune of $10 billion starting in the beginning of their fiscal year 2019, which that are already in. That is something that will take some time to carry out, but that should provide a healthy level of support for the stock as its shares outstanding are reduced, which adds to the stock’s value argument right now.
Fundamental and Value Profile
Micron Technology, Inc. (MU) is engaged in semiconductor systems. The Company’s portfolio of memory technologies, including dynamic random-access memory (DRAM), negative-AND (NAND) Flash and NOR Flash are the basis for solid-state drives, modules, multi-chip packages and other system solutions. Its business segments include Compute and Networking Business Unit (CNBU), which includes memory products sold into compute, networking, graphics and cloud server markets; Mobile Business Unit (MBU), which includes memory products sold into smartphone, tablet and other mobile-device markets; Storage Business Unit (SBU), which includes memory products sold into enterprise, client, cloud and removable storage markets, and SBU also includes products sold to Intel through its Intel/Micron Flash Technology (IMFT) joint venture, and Embedded Business Unit (EBU), which includes memory products sold into automotive, industrial, connected home and consumer electronics markets. MU’s current market cap is $50.5 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings more than doubled, while revenues increased by about 40%. In the last quarter, the increase in earnings was more modest, but still attractive at a bit over 11%, while sales increased by 6%. The company operates with one of the biggest margin profiles that I’ve seen in the marketplace, with Net Income running at a whopping 49% of Revenues for the last twelve months, and 43% in the last quarter.
- Free Cash Flow: MU’s free cash flow is very healthy, at a more than $7.5 billion. In a recent interview about the company’s buyback program, MU’s CFO stated their goal for free cash flow was around $4 billion in the long term, which would still be an outstanding figure.
- Debt to Equity: MU has a debt/equity ratio of .20. This number reflects the company’s manageable debt levels. The company’s balance sheet indicates cash and liquid assets are a little over $7 billion versus debt of about $5.8 billion.
- Dividend: MU does not pay an annual dividend, which is the norm for most tech stocks.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MU is $25.45 per share and translates to a Price/Book ratio of 1.71 at the stock’s current price. Their historical average Price/Book ratio is 2.26. That suggests the stock is trading right now at a discount of more than 31%, and that puts the stock’s long-term target above $57 per share. That price target is supported by the fact that the stock’s Price/Cash Flow ratio is also trading about 31% below its historical average.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s upward trend from last year to its high in late May of this year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock has been dropping sharply from that high at around $65 per share, with the drop accelerating over the last week or so as the stock dropped from about $53 to its latest low at around $41. That decline marks an intermediate downward trend that appears to be gaining strength, which is why if you think the stock is a great bargain right now as I do, you have to be willing to accept the fact that the stock could drop even lower than its latest low. The stock’s next most likely major support point is around $37.50 per share as indicated by the 88.6% retracement line. A reversal of the intermediate trend can’t really be considered unless the stock breaks above $50 as a minimum short-term target, which is something that I think is pretty unlikely given the stock’s current momentum. Another possibility that I would consider encouraging, but that would require a longer period of time to materialize, would be to see the stock begin to stabilize anywhere between $41 and $48 per share. That would decelerate the downward trend’s momentum and improve the likelihood the stock could stage a major, long-term trend reversal.
- Near-term Keys: The truth is that right now, a short-term bullish trade on MU is extremely speculative, no matter whether you want to buy the stock or work with call options. The stock is showing far more downside exposure than upside opportunity, which means that the only reasonable kind of short-term trade right now for the stock comes from bearish trades like shorting the stock or using put options with an eye on the $37.50 level as a price target. MU is a stock that I don’t think is going to recover to reclaim its 52-week highs quickly; but if you’re looking for a smart long-term play with big upside, pay attention to this stock. Any continued bearish momentum the stock could show will just make the bargain picture look even better than it is now.