My Investment Rating for Micron Technology, Inc. (NASDAQ:MU) Shares is a buy.
I previously initiated coverage of MU with a July 27, 2021 article that focused on the company’s medium-term growth prospects over the next five years. In my With the latest update, I turn my attention to the preview of Micron’s Q4 FY 2022 (YE August 31) earnings announcement on September 29, 2022.
Based on my analysis, Micron guarantees a buy rating before profits.
Its shares have seen a significant year-to-date correction in 2022, and current valuations are enticing. The significant downward revision in MU consensus numbers suggests there shouldn’t be any major downside surprises when Micron reports quarterly earnings next week. More importantly, the long-term outlook for MU remains positive; I am positive about Micron’s change in its revenue mix and increasing customer adoption of forward pricing arrangements going forward.
MU stock metrics
MU revealed certain key metrics in an 8-K filing released on August 9, 2022 that sets expectations for the forthcoming fourth quarter earnings release.
In the 8-K filing, Micron emphasized that its “FQ4 (2022) earnings could be at or below the low end of revenue guidance.” MU specifically mentioned that its “expectations for CY22 (calendar year 2022) industry demand growth for DRAM and NAND declined due to “macroeconomic factors and supply chain constraints.”
Prior to its Aug. 9, 2022 announcement, MU had previously forecast in late June that it should post revenue of between $6.8 billion and $7.6 billion for the fourth quarter of fiscal 2022. In other words, Micron anticipates that the company’s Q4 FY 2022 revenue could be as low as $6,800 million, an expected decline of -21% qoq and -18% year-on-year.
The company also participated on the day that Micron released its 8-K Forward-Looking Expectations filing KeyBancs Capital Market Technology Leadership Forum.
In the KeyBancs Investor Event added to Micron that its customers’ “inventory adjustments” have “widened out” to “most end markets” and “actually slowed down even more” since late June. Previously only the smartphone and PC end markets were showing signs of weakness; but even the industrial, automotive and data center end markets did not fare so well in August.
This explains why MU has become even more pessimistic about its financial performance for the fourth quarter of fiscal 2022, as reflected in key metrics related to fourth-quarter revenue expectations presented in the 8-K filing dated August 9, 2022 were published.
Micron expected to beat earnings?
I don’t expect Micron to beat market expectations next week with the release of its fourth-quarter fiscal 2022 results. On the other hand, I think MU’s fourth quarter is also unlikely to fall far short of investors’ expectations. In other words, I’m betting on Micron next Thursday, April 29th.
There are two main reasons I’m confident that MU’s bottom line for the fourth quarter of fiscal 2022 will at least meet Wall Street expectations.
The first reason is that the sell-side consensus numbers already include Micron’s updated guidance, which was released in early August.
In the past three months, 24 of the 36 Wall Street analysts covering MU stock have lowered their top-line forecasts for Micron for the fourth quarter of fiscal 2022, and 23 of them have lowered their forecasts for earnings Share or earnings per share for the fourth quarter. Q4 FY2022 MU sell-side consensus estimates were cut by -25% and -45%, respectively. The current consensus topline estimate for Micron is $6,812 million S&P Capital IQand this is consistent with the disclosure in management’s 8-K filing that MU’s revenue is expected to be approximately $6.8 billion or less in the fourth quarter of fiscal 2022.
The second reason is that Micron’s comments at a recent investor event earlier this month appear to have implied that things haven’t gotten any worse since Aug. 9, 2022.
at Deutsche Bank’s (DB) 2022 Technology Conference on September 1, 2022, MU emphasized that “there is no update today,” and reiterated its updated revenue guidance per its 8-K filing previously released in early August.
Separately, Micron noted at DB’s September 2022 conference that “we can control our own capabilities” and “invest in technology and increase productivity across the business and do other things that will help us maintain the best possible margin.”
It is inevitable that the revenue decline for MU will result in lower profitability for the company due to negative operating leverage. But judging by Micron’s comments at the recent DB conference, the company’s management is aware of the need to optimize costs. This suggests a lower likelihood that Micron’s actual profit margins for the fourth quarter of fiscal 2022 will come in significantly below investors’ expectations.
Is Micron Stock Undervalued or Overvalued Now?
Micron’s stock price has nearly halved so far in 2022. Year-to-date, MU shares are down -48.1%, the stock has also underperformed the S&P 500, which is down -21.7% over the same period. The significant drop in Micron’s stock price in 2022 means it’s a good time to assess MU’s valuations and determine whether the company’s stock is undervalued.
In terms of asset-based valuations, Micron is currently trading at a trailing price-to-tangible book value or P/TBV of 1.15 times according to valuation data obtained from S&P Capital IQ. Specifically, MU has not traded below tangible book value or a P/TBV multiple of 1 for the past six years.
In terms of earnings-based valuations, market values MU are at consensus forward P/E multiples for fiscal years 2023 and 2024 of 10.0x and 6.5x, respectively. Wall Street analysts expect Micron’s earnings per share to fall -41% to $4.95 for fiscal 2023 before expanding +55% to $7.66 for fiscal 2024 will recover.
The sell-side analyst is an exception to this city (C) covers estimates by MU that Micron’s earnings per share will be around $7.75 “in a normalized cycle,” and the stock trades at an implied P/E ratio of 6.4 based on that normalized cycle -EPS number. In short, MU’s forward P/E valuations appear undemanding across various bottom line forecasts.
In summary, my opinion is that Micron stock is undervalued. My view is supported by comparing MU’s current valuations to its long-term prospects, as detailed in the next section of the current article.
What is Micron’s long-term outlook?
At the Company’s 2022 Investor Day on May 12, 2022, MU outlined its expectations that it will be able to deliver a high single-digit percentage cross-cycle return on sales CAGR and an operating profit margin of approximately 30% over the long term.
I think Micron’s long-term growth and profitability goals are reasonable and realistic.
In terms of revenue growth, the positive change in revenue mix from MU to end markets should be a key factor.
Micron said at Investor Day 2022 that the revenue contribution from the more cyclical PC and smartphone end markets will decline from 55% in fiscal 2021 to 38% in fiscal 2025. By fiscal 2025, MU expects other end markets like automotive, industrial, and data center, supported by structural growth drivers, to generate the remaining 62% of total revenue.
In terms of profitability, MU plans to enter into long-term forward pricing agreements with more of the company’s customers over time, as announced at its Investor Day in May 2022.
Per management’s comments at Investor Day, Micron acknowledged that “these forward pricing agreements are very new.” But MU stressed that his goal is to “continue to work with our customers in all different market segments over the next few years” to get more customers to embrace this idea of ”forward pricing agreements.” Going forward, this should result in more stable gross (and operating) profit margins for MU.
Is MU stock a Buy, Sell or Hold?
MU shares remain a buy recommendation for me. A high single-digit forward P/E multiple for Micron is attractive when you compare that valuation metric to the company’s long-term expectations of a high-single-digit annual growth rate and 30% operating margin. My view is that Micron stock should eventually re-rate and post low cross-cycle and normalized P/E in the low teens if the market environment turns for the better.