Micron Technology (MU) offers memory and storage solutions. Micron Technology has four main business segments.
First, is the Compute and Networking Business Unit (CNBU), which sells memory products to client, cloud server, enterprise, graphics, and networking markets.
Second, is the Mobile Business Unit (MBU), which sells memory products to smartphone and related mobile markets.
Third, the Storage Business Unit (SBU) sells solid-state drives (SSDs) and solutions to enterprise, cloud, client, and consumer storage markets, as well as other storage products.
Lastly, the Embedded Business Unit (EBU) sells memory and storage products to automotive, industrial, and consumer markets.
In 2021, Micron Technology has been underperforming the broader U.S. stock market, as its shares have losses of about 3.4% compared to gains of 25% for the S&P 500 as of November 4, 2021.
I am bullish on MU stock both from a fundamental and valuation perspective. (See Analysts’ Top Stocks on TipRanks)
Strong Fundamentals Are Supportive amid a Global Chip Shortage Crisis
For several months in 2021, news about a global chip shortage has been making headlines. Micron Technology has been hit by this shortage, which is reflected in its revenue, and it forecasts that this shortage may last until 2022.
Still, after two consecutive years of revenue decline in 2019 and 2020, Micron Technology posted revenue growth of 29.2%, or $27.7 billion, in Fiscal Year 2021. This compared to revenue of $21.44 billion in Fiscal Year 2020. Furthermore, net income surged 118.1% to $5.86 billion.
Micron Technology has a strong balance sheet, with a debt-to-equity ratio of 0.17 and profitability that is consistent and strong, although it is subject to volatility.
After a rather bad financial performance in Fiscal Year 2020, in 2021, Micron Technology has recovered in several key financial metrics.
I particularly want to highlight three major improvements in margins, that show a comeback is underway even amid a negative global chip shortage. In 2021, its operating margin improved to 24.4%, net margin to 21.2%, and return on equity to 14.1%. For 2020, operating margin reported was 14.3%, the net margin was 12.54%, and the return on equity was 7.18%.
The free cash flow trend is also very positive and growing, despite a large decline in 2020. Another positive factor is that in August 2021, Micron Technology initiated a quarterly dividend of $0.10 per share.
Dividend Policy Signals That Management Is Optimistic
The dividend yield by itself is not excessive, on the contrary, it is a marginal one. If Micron stock remains flat at the current price of about $71.60, the forward annual dividend yield would be 0.55%. It is not a factor itself to generate too much income for investors. However, it is the vote of confidence that management of Micron Technology has in its business outlook that matters most.
“Micron’s remarkable transformation over the last several years has put the company in an outstanding position, with technology leadership, a robust product portfolio, enhanced profitability, and a strong, investment-grade balance sheet. This transformation creates the opportunity today to enhance the value of our capital returns program,” said Micron Technology President and CEO Sanjay Mehrotra.
The CEO then continued to say, “initiating a common stock dividend reflects our confidence in Micron’s future and our commitment to creating compelling value for shareholders.”
I appreciate a lot of management’s efforts to add value to its shareholders. In this very important topic, it was stated that “the dividend augments the share repurchase plan that Micron announced in May 2018. Through its most recently reported quarterly results, Micron has returned approximately $4 billion in share repurchases and the cash settlement of convertible securities, retiring 90 million shares at an average price of $42.”
Micron Technology has a lot of room to grow its dividend gradually due to the low payout ratio. It shows a disciplined approach to initiating a dividend policy, and this is very positive news.
Micron Will Spend $150 Billion to Meet Chip Demand
Micron Technology will invest more than $150 billion globally in manufacturing and R&D over the next decade to achieve and support growth for the data economy. This is very important and positive news.
A simplistic estimate of an average of $15 billion per year in capital expenditures for the next decade shows two important things.
First, this assumption of average yearly capital expenditures is much higher than the actual CapEx figures for the years 2017-2021.
Second, it enhances management’s optimism and belief that strong business opportunities such as 5G and AI are worth exploring, and that the long-term benefits in terms of revenue and profitability are justified according to financial projections.
Is it a risky move? Yes, but with risks come the rewards.
Valuation: MU Stock Is Not Expensive Now
MU stock now has a PEG ratio of 0.87. Micron’s price/sales, price/book, and price/cash flow ratios are 2.9, 1.8, and 6.7, respectively. For the semiconductors & semiconductor equipment industry, these ratios are 5.2, 6.6, and 20.7, respectively.
Wall Steet’s Take
Turning to Wall Street, Micron has a Moderate Buy consensus rating, based on 15 Buys, six Holds, and one Sell assigned in the past three months. The average Micron price target of $96.09 implies 32.1% upside potential.
Analyst price targets range from a low of $58 per share to a high of $165 per share.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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