Micron Technologies: Finally Get Credit As Equities Rally

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Micron Technologies (UM) is a world leader in memory semiconductors, with an impressive portfolio of DRAM and NAND chips. Nvidia (NVDA) and Advance Micro Devices (AMD), which specialize in GPUs / CPUs, have recovered significantly in recent years. However, memory leader Micron has been left behind for the past year or so, only to start a recent three-month rally to decades-long highs. But after a 35% rally from October 2021, Micron has consistently underperformed other (no memory) semiconductor leaders.

The recent price action is seen by many, including myself, as completely justified. Analysts currently have a consensus price target of $ 359.17. Of the 26 analysts covering Micron, there are 24 buy ratings, 2 holds and 0 sells.

Despite the cyclical nature of semiconductors leading to large swings in earnings, I think Micron still offers an attractive valuation and has yet to peak earnings this cycle.

Micron is very well positioned as an integrated manufacturer, with 12 manufacturing sites around the world. The semiconductor manufacturing process is notoriously specialized, and barriers to entry are nearly impossible to overcome, meaning that a small number of global semiconductor manufacturers dominate their sub-sectors in the chip market.

If the market demands more chips or a particular industry needs more chips, it is not as simple as increasing the volume on the production lines. On the contrary, it takes years of careful planning to expand or build new manufacturing sites, which must be completely dust-free and use high-cost custom-made machines to manufacture the memory chips. Even memory chips have a very long manufacturing process, which takes weeks or months from start to finish. In addition, constant high maintenance CapExs are required to support the ever-changing manufacturing. It is not CapEx used to increase production.

Micron currently directs CapEx spending in 2022 to between $ 11 billion and $ 12 billion, much of which is for increased R&D efforts. In addition, management has said it will commit $ 150 billion in capital spending over the next decade to increase production capacity. Clearly Micron will experience a cyclical downturn before 2030, but it is the company’s long-term strategy to build more sites for future cycles, which will allow Micron to remain competitive during times of peak profitability. .

The micron has not yet reached its cyclical peak

While there is a long term plan to increase production, it will not affect supply for several years. Essentially, management is increasing supply in anticipation of the longer term market trend where more memory chips are needed for automakers, smartphones, computers, 5G infrastructure, adoption of the artificial intelligence, etc.

The longer term tailwind for Micron is that we need more memory. Sectors like the automotive industry continue to have very strong demand for semiconductors, and in December, lead times for automakers increased further, due to semiconductor shortages. The deadlines are now 25 weeks, compared to 22 weeks in October 2021 and 13 weeks in October 2020, according to data from Susquehanna Financial Group.

All major memory vendors – Samsung, SK Hynix and Micron, have said they intend to tighten supply to reduce the cyclical nature of the industry. I don’t know how well this will work in the longer term. However, there is no sign of falling demand or significant oversupply in the memory market in 2022. Looking ahead, analysts say Micron is very far from a cyclical peak, with revenue expectations of $ 32.17 billion and $ 38.58 billion for fiscal years 22 and 23 respectively. . Additionally, free cash flow is guided by Wall Street at $ 4.81 billion and $ 7.28 billion for fiscal years 22 and 23 respectively.

So while different segments experience small fluctuations in demand over the course of the year, such as a decline in corporate IT, which is expected to improve as workers return to the office – there is no indication that DRAM or NAND demand will experience a downward trend in 2022. DRAM as a whole, which accounts for around 73% of total revenue, is expected to grow in line with management demand expectations, which is around from middle to high adolescence.

Micron has positioned itself as a key market leader with the first 1 alpha node process technology, which can produce DRAM chips that consume considerably less power (around 20%). Indeed, Micron is part of a memory oligopoly and is even slightly ahead of its memory-making peers.

Balance sheet and distribution of capital

Micron has a very healthy balance sheet, with cash flow of $ 9.58 billion, including cash equivalents. Therefore, its total debt of $ 7 billion could easily be repaid.

Micron has a current ratio of 3.1x and a rapid ratio of 2.28x, which suggests that it is more than well capitalized and, based on the forecast, will likely see further growth in assets on the balance sheet at the end of the year. to come up. The tangible book value continues to grow, and from a stock perspective, the current tangible book value per share is $ 39.62.

Last year, management decided to start distributing to shareholders. A very small quarterly dividend of $ 0.10 per share will be distributed by Micron on January 18 and management plans to increase it slowly over time.

This once again demonstrates management’s confidence in future growth, as starting a temporary dividend, and then reducing it in the future, will further hurt investor confidence in the long run. In addition, management wants to repurchase shares to reduce the total number of shares, which should offset the dilution due to maturing convertible bonds and employee SBCs. However, this is an opportunistic buyback policy, which means that if prices continue to rise up to $ 100, management will likely slow down buyouts as the price gets closer to the intrinsic value of the. ‘action.

Evaluation

Micron has a current forward EV / EBITDA (NTM) of 5.27x, which means that even after the recent rally, Micron’s valuation remains attractive at low multiples. The valuation alone says very little about investors, and in particular, valuation against future growth is much more important.

Micron is guided to maintain strong double-digit growth for EBITDA and free cash flow over the next 2 years, indicating that this current estimate of 5.39x EV / EBITDA is still impressive – given that maximum profitability has historically been rewarded with a multiple of 8 to 10x by the market. In October of last year, Micron was listed at 4x NTM EV / EBITDA; However, even now, after a three month recovery, Micron is still rated as a business in decline.

Conclusion

For the reasons discussed above, I am bullish on Micron, despite the risk of a long-term cyclical market. Oil and energy are also cyclical markets; however, the long-term returns of the top performing oil producers have been very strong. With Micron as the market leader with significant barriers to entry, an attractive valuation and longer-term tailwind of memory growth should serve to justify higher price action in 2022.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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