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Micron: 2022 Will Be Highly Profitable
Stock Analysis & Ideas

Micron: 2022 Will Be Highly Profitable

Micron Technology (MU) is one of the leading computer memory producers in the world, and benefits a lot from megatrends such as digitalization, autonomous driving, and virtual reality.

The company will be widely profitable next year, but since shares have risen substantially in recent weeks, I am now neutral on the stock, despite its healthy fundamental outlook. (See Analysts’ Top Stocks on TipRanks)

Micron Benefits from Macro Tailwinds

Micron Technology is one of the top producers of DRAM and NAND memory, with top peers being Samsung and SK Hynix. Thanks to consolidation in the industry over the last decade, the combined market share of these three companies stands at more than 90%, effectively making the memory producers an oligopoly.

This has allowed for rising margins and better returns on capital, although it should be noted that memory markets still remain cyclical, which is why Micron’s results do experience considerable ups and downs over the years. The ups are getting higher, as do the nadirs, however, which is the result of positive long-term tailwinds.

One of these is digitalization — no matter whether it is for work or for recreation, people spend more time on their tablets, smartphones, etc., which leads to ever-growing data usage. All this data has to be processed, which leads to an ever-growing demand for memory at data centers.

Other macro tailwinds that have a positive impact on Micron’s business cycles include autonomous driving — which requires huge amounts of data that has to be processed very fast — and the virtual reality space, or what Marc Zuckerberg calls the Metaverse.

All of these trends that are in place and those that will become more dominant over the coming years do require vast amounts of additional processing and memory power, which bodes well for memory demand, while also being beneficial for semiconductor companies in general.

In the long run, Micron is thus able to sell to an ever-growing market, which should translate into attractive business growth opportunities during the 2020s.

2022 Will Be a Strong Year

As mentioned above, Micron’s business is cyclical, and right now, we are in an upwards cycle: The company’s three most recent quarterly results showed revenue growth of 30%, 36.5%, and 36.6%, respectively, proving accelerating growth opportunities on the back of strong memory pricing.

This fiscal year, which ends in summer 2022, Micron is forecasted to earn $8.97 on a per-share basis, and things will be even better in the following year if the analyst community is correct. Micron is forecasted to generate earnings per share of $10.91 next fiscal year, which pencils out to a more-than 20% increase relative to what is expected for the current year (which is mostly in the books already).

The current fiscal year and the following year will thus be immensely profitable years for Micron, as far as we know today, but due to the cyclicality of the business, further growth beyond that point is not guaranteed.

In fact, analysts are currently predicting that earnings will be flat or down slightly in fiscal 2024 — when investing in a memory producer such as Micron, these downturns have to be expected from time to time.

Valuation

A few weeks ago, Micron’s shares were very out of favor, and the company’s share price dropped to the mid-$60s. At that point, shares traded for just around 7x the profits that are forecasted for the current fiscal year.

Since then, however, Micron Technology has seen its shares recover considerably. At almost $86 per share, Micron currently trades at much less of a bargain.

At a little more than 9x forward earnings, Micron still is far from expensive, but due to the cyclicality of the business, Micron generally does trade at a significant discount compared to other semiconductor stocks. At 9-10x net profits, Micron is still not overvalued at all, and likely even trading below fair value, but the dip-buying opportunity seen a couple of weeks ago has passed for now.

Wall Street’s Take

Turning to Wall Street, Micron has a Moderate Buy consensus rating, based on the 15 Buys, six Holds, and one Sell assigned in the past three months.

At $96.09, the average Micron price target implies 11.5% upside potential.

Disclosure: At the time of publication, Jonathan Weber did not have a position in any of the securities mentioned in this article.

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