Concerns about high inflation continue to spook investors as the U.S. Bureau of Labor Statistics’ latest data, released on Wednesday, indicated that inflation (as measured by the consumer price index) rose 8.3% year-over-year in April. Although slightly lower than the 8.5% reading in March, the April inflation figure was worse than Bloomberg’s estimate of an 8.1% gain.
The S&P 500 (SPX) and Nasdaq Composite (NDX) have declined 17.4% and 27.4% year-to-date, respectively, on worries of high inflation, supply chain woes, geopolitical tensions and rising interest rates.
Amid such challenging times, many investors look for value stocks, which are stocks currently trading at lower price levels relative to their fundamentals, like earnings, sales or cash flows, thus making them attractive investment options.
Micron Technology (NASDAQ: MU)
Micron is one of the leading players in the semiconductor space, offering DRAM (dynamic random access memory), NAND, and NOR memory and storage products under its Micron and Crucial brands. DRAM accounts for more than 70% of the company’s revenue.
The increased use of semiconductors in computing devices, data centers, the automotive industry and several other applications bodes well for Micron.
However, Micron and its peers have been struggling to meet the elevated demand as supply chain disruptions have impacted their production capacities and have led to a shortage of chips. The ongoing Russia-Ukraine war has made matters worse as the region is a key supplier of noble gases and other vital minerals needed for semiconductor manufacturing.
Even amid a tough business landscape, Micron delivered upbeat Q2 FY22 (ended March 3, 2022) results, with revenue rising 25% to $7.8 billion driven by higher selling prices and strong demand, especially from data centers. Adjusted EPS more than doubled year-over-year to $2.14 boosted by robust top-line growth and margin expansion.
Micron’s innovative products, like 1α DRAM and 176-layer NAND, are built using advanced technology and are helping to reduce the company’s cost base and enhance margins.
Impressive Q2 results and strong outlook prompted Mizuho analyst Vijay Rakesh to raise his price target on Micron stock to $113 from $110. The top-rated analyst reaffirmed a Buy rating, stating that the company is “well positioned into 2022 with opportunities in data center, PC, and mobile with a potentially improving pricing environment.”
Overall, Micron stock boasts a Strong Buy consensus rating backed by 14 Buys and two Holds. The average Micron price target of $114.69 implies 71.28% upside potential from current levels. Shares have plunged 28% so far this year.
International Business Machines (NYSE: IBM)
Tech giant IBM, often called Big Blue, sells software and hardware, and offers consulting services and hybrid cloud infrastructure solutions. As part of its strategy to focus on its open hybrid cloud and AI (Artificial Intelligence) solutions, the company spun off its Managed Infrastructure Services unit last year as a separate public company called Kyndryl (KD).
IBM’s efforts to optimize its business to focus on more profitable, higher growth opportunities seem to be paying off as reflected in its impressive Q1’22 results.
Revenue grew about 8% to $14.2 billion, thanks to higher software and consulting revenues driven by demand for hybrid cloud and AI. Adjusted EPS rose 25% to $1.40.
On Wednesday, Bank of America analyst Wamsi Mohan reiterated a Buy rating with a price target of $165 following the company’s Think event. Highlighting the key takeaways from the event, Mohan noted that IBM is on track to achieve its mid-single-digit revenue growth, assuming no recession, and free cash flow target of about $35 billion over the next three years.
Mohan also stated that the company’s software growth is expected to be driven by RedHat (acquired in 2019), incremental mergers and acquisitions, and by leveraging the partner ecosystem.
The analyst mentioned that IBM has considerable consulting prospects given its focus on both public cloud and hybrid cloud opportunities. He also pointed to better infrastructure business based on the upcoming z16 Mainframe launch.
Overall, the Street is cautiously optimistic on IBM, with a Moderate Buy consensus rating that breaks down into five Buys and four Holds. At $152.11, the average IBM price target suggests 16.34% upside potential from current levels. Shares are down 2.1% so far this year. IBM offers a dividend yield of 5.1%.
Citigroup (NYSE: C)
Investors are generally keen about picking some good bank stocks amid a rising interest rate environment. However, an uncertain macro backdrop and the ongoing geopolitical unrest could impact investor sentiment about bank stocks.
Last month, Citi reported a year-over-year decline in its Q1’22 revenue and earnings, but still smashed analysts’ expectations. Q1’22 EPS fell 44% to $2.02 due to higher expenses, lower credit costs and a 2% drop in revenue to $19.2 billion.
Citi set aside $1.9 billion in Q1 for potential loan losses related to the Russia-Ukraine war and the related impact. Despite higher net interest income, revenue declined due to lower non-interest revenue across businesses.
Citi is one the leading global banks, serving about 200 million customer accounts in over 160 countries. The company is now pursuing the sale of its consumer and commercial banking activities in Russia. This move is a part of Citi’s decision to revamp its operations to direct its investments and resources to businesses with the greatest scale and growth potential.
Last year, Citi announced its plans to exit consumer banking operations in 13 markets across Asia and EMEA (Europe, Middle East and Africa).
Bank of America analyst Ebrahim Poonawala felt that Citi’s recent results were reassuring and reiterated a Buy rating with a price target for $60.
Poonawala believes that Citi’s investors need to be patient given the lack of near-term catalysts. The analyst highlighted that aside from its attractive valuation, Citi’s capital returns also seem compelling given the $3 billion buybacks in Q1’22. Poonawala predict buybacks of $1 billion per quarter through this year and $8 billion in both 2023 and 2024.
Citi also rewards its investors with dividends, with its forward dividend yield standing at 4.2%.
All in all, Citi scores a Moderate Buy consensus rating based on eight Buys, eight Holds and one Sell. With shares down 21% year-to-date, the average Citigroup price target of $65.41 implies 37.24% upside potential from current levels.
Wall Street seems most bullish on Micron currently, based on the company’s strong execution and the robust demand for semiconductor chips in 5G devices, data centers, electric vehicles and several other applications. While the other two compared here are large corporations with historically strong fundamentals, it appears that Micron is best positioned to outperform the group.
Given the year-to-date pullback in Micron stock, investors looking for attractive value picks could consider Micron based on its robust growth prospects. The stock is currently trading at a P/E (price-to-earnings) multiple of 8.3 compared to the semiconductor industry average of 19.4. Moreover, the calculated average price target for Micron represents the highest 12-month potential upside, out of the three stocks.
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