Is Micron Technology (MU) a Buy

Financial pros are tripping over themselves to find the next Nvidia (NVDA).

Search volume amongst asset managers skyrocketed in Q1 this year as the underinvested tried to play catch-up.

So, it wasn’t much of a surprise to see them start poring over Micron Technology’s (MU) financials after the stock climbed over 30% after reporting stellar earnings in late March.

Buoyed by supply shortages, Micron’s revenues fell 58% Year-over-Year, and gross profits finally swung into the positive.

And at 15.5x forward operating cash flow, shares are cheaper than they’ve been in a while. 

But does that make it right for your portfolio?

Micron’s Business

Micron is a big player in the memory and storage game. They make the tiny but essential components that go into all sorts of devices, from your smartphone to your laptop, and even in cars and factories. 

Without companies like Micron, our digital world would come to a screeching halt.

Over the years, they’ve achieved some pretty impressive feats, like being the first to introduce certain advanced types of memory chips.

Their four main business segments break down as follows:

• Compute and Networking (37% of revenue): This is all about memory for PCs, servers, and networking gear. It makes up the biggest chunk of Micron’s revenue.
• Mobile (23% of revenue): As the name suggests, this segment focuses on memory for smartphones and other mobile devices.
• Storage (16% of revenue): Micron makes solid-state drives (SSDs) and other storage solutions for data centers, businesses, and regular folks like you and me.
• Embedded (23% of revenue): This segment deals with memory for things like cars, industrial machines, and consumer electronics.

Lately, Micron has been making moves to stay ahead of the curve by investing in cutting-edge technologies and forming partnerships with other tech giants to develop the memory solutions of the future. 

They’re also focused on high-growth areas like data centers, 5G networks, and automotive applications.

Q2 was a banner report for Micron, with revenue up 58% Year-over-Year, and gross profits finally turned positive for the first time since 2022.

Management expects memory chip prices to rise throughout 2024. However,  ongoing trade tensions between the US and China could cause some headaches for Micron, and they face stiff competition from other memory makers, especially in China.

Financials

Source: Stock Analysis

Micron’s revenues tanked in 2023 as disputes with China led to sales in Hong Kong dropping by 80% from 2021, while sales in China fell by 11%.

Nonetheless, the company has bounced back, with demand picking up, leading to stronger pricing power.

Profit margins also improved, with the company finally turning a net income profit in the last quarter.

Yet, challenges lay ahead.

Operating cash flow at $2.9 billion is a fraction of the $15.1 billion hit in 2022. forward estimates put the company at $8.8 billion for the next twelve months.

However, Capex guidance for 2024 sits at $7.5-$8.0 billion, leaving little room for dividends, which currently yield 0.37%.

The good news is Micron holds $9.0 billion in cash against $14.4 billion in total debt, leaving it in a healthy position.

Valuation

Source: Seeking Alpha

Micron’s profitability has only just improved. So, we’re left with forward-looking metrics to evaluate the company.

As we noted earlier, the 15.5x forward operating cash is a significant improvement for the company. However, it’s well above its 5-year average of 9.6x.

Peers like Intel (INTC) trade at just 10.7x forward cash, while Tawain Semiconductor (TSM) is comparable at 14.0x forward cash.

Growth

Source: Seeking Alpha

Similar to profitability, Micron’s turnaround has only just happened.

So, its growth metrics are abysmal.

However, forward revenue growth at 3.8% isn’t that enticing. It’s barely above slow-growth Intel’s 0.6%.

And Micron’s forward EBITA growth is still negative. So, although things are improving, they’re not quite there.

Profitability

Source: Seeking Alpha

To show you how far Micron has to go, gross margins reached 18.5% in the latest quarter. They ran over 40% from 2017-2019.

Quite simply, Micron isn’t in the same ballpark yet as its peers.

Our Opinion 5/10

What happens if China suddenly allows Micron to ship into the country at full throttle?

It would certainly be a catalyst. It’s unlikely, and even if it was, Micron would have to reramp production.

The structural changes faced by the company will take years to play out.

In the meantime, we don’t see this as a quality investment, especially given the other growth names in this industry.