With a $63.36 billion market cap, Micron Technology, Inc. (MU) designs, manufactures, and sells memory and storage products worldwide. The company operates through four segments: Compute and Networking Business Unit; Mobile Business Unit; Storage Business Unit; and Embedded Business Unit.

Semiconductor stocks have been underperforming the broader market lately due to slowing chip demand, especially for data centers and the smartphone market, amid a sharp decline in consumer spending due to sky-high inflation and interest rate hikes. The pullback in chip stocks is evident from the iShares Semiconductor ETF’s (SOXX) 32.1% year-to-date decline.

MU has lost 27.7% over the past six months and 40% year-to-date to close the last trading session at $57.44. It is currently trading 41.7% below its 52-week high of $98.45, which it hit on January 5, 2022.

Thus, the recent pullback in MU provides investors with the golden opportunity to buy this quality chip stock at a discount. Its solid fundamentals indicate a rebound soon. Wall Street analysts expect the stock to hit $73.57 in the near term, representing a 28.1% upside potential.

Moreover, the company delivered record revenue for the fiscal 2022 third quarter, driven by its team’s brilliant execution across products, technology, and manufacturing. As the industry demand environment has weakened recently, Micron has mainly focused on moderating supply growth to improve its profitability.

Furthermore, the company’s portfolio strategy is to strengthen its focus on memory and storage innovations for the data center market.

On September 1, MU announced plans to invest approximately $15 billion in New Idaho Fab, bringing leading-edge memory manufacturing. This will be the first new memory manufacturing fab in the United States in 20 years and is expected to ensure the domestic supply of leading-edge memory required for market segments, such as automotive and data centers.

In July, MU announced the availability of its new DDR5 server memory, DRAM, to data center customers. DDR5 has an improved memory architecture, increased JEDEC speeds of 4800MT/s, and on-module power management capabilities. The new offering is expected to maximize performance for AI, HPC, and other data-intensive applications and workloads.

Here is what could influence MU’s performance in the upcoming months:

Robust Financials

For the fiscal 2022 third quarter ended June 2, 2022, MU’s revenue increased 16.4% year-over-year to $8.64 billion. Its non-GAAP gross margin amounted to $4.10 billion, up 28.6% year-over-year. The company reported a non-GAAP operating income of $3.14 billion, up 33% from the prior-year period.

In addition, the company’s non-GAAP net income grew 35.3% from the prior-year period to $2.94 billion, and its non-GAAP earnings per share came in at $2.59, registering an increase of 37.8% year-over-year. Cash inflows from operating activities rose 32.9% from the year-ago value to $11.40 billion.

Favorable Analyst Estimates

Analysts expect MU’s revenue for the fiscal year 2022 (ended August 2022) to come in at $30.99 billion, indicating an increase of 11.9% from the same period in 2021. The consensus EPS estimate of $8.34 for the to-be-reported quarter represents a 37.6% year-over-year growth.

In addition, the company has topped the consensus EPS estimates in each of the trailing four quarters, which is impressive.

Discounted Valuation

In terms of forward non-GAAP P/E, MU is currently trading at 6.87x, 62.1% lower than the industry average of 18.13x. The stock’s forward EV/Sales of 1.91x is 32.3% lower than the industry average of 2.8x. Also, its forward EV/EBITDA multiple of 3.46 compares with an industry average of 12.62.

Furthermore, in terms of forward Price/Sales, MU is currently trading at 2.04x, 28.5% lower than the industry average of 2.86x. The stock’s forward Price/Cash Flow multiple of 4.33 is 76.3% lower than the 18.25 industry average.

High Profitability

MU’s trailing-12-month EBIT margin of 34.51% is 364.2% higher than the 7.43% industry average. Its trailing-12-month EBITDA margin of 55.67% is 326% higher than the 13.07% industry average. Likewise, the stock’s trailing-12-month net income margin of 30.61% is 614.4% higher than the industry average of 4.28%.

Also, the stock’s trailing-12-month levered FCF margin of 9.93% compares to the industry average of 8.03%. Its trailing-12-month ROCE, ROTC, and ROTA of 21.66%, 13.12%, and 15.18% are higher than the industry averages of 7.22%, 3.97%, and 2.84%, respectively. Its trailing-12-month CAPEX/Sales of 32.32% is 1,228.7% higher than the industry average of 2.43%.

POWR Ratings Show Promise

MU's overall B rating translates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. MU has a grade of A for Value, consistent with its lower-than-industry valuation multiples. Also, it has a B grade for Quality, in sync with its higher-than-industry profitability multiples.

MU is ranked #28 out of 94 stocks in the B-rated Semiconductor & Wireless Chip industry.

Beyond what I have stated above, we have also given MU grades for Sentiment, Growth, Momentum, and Stability. Get access to all the MU ratings here.

Bottom Line

MU delivered record end-market and product revenue in the third quarter of fiscal 2022. Despite the slowing industry demand, analysts are hopeful about the company’s revenue and earnings growth prospects due to its consistent capital expenditures. So, we think it could be wise to buy the dip in the stock now.

How Does Micron Technology, Inc. (MU) Stack Up Against its Peers?

MU has an overall POWR Rating of B. One could also check out these other stocks within the Semiconductor & Wireless Chip industry with an A (Strong Buy) rating: STMicroelectronics N.V. (STM), Advantest Corporation (ATEYY), and Broadcom Inc. (AVGO).

MU shares were trading at $57.46 per share on Monday afternoon, up $0.02 (+0.03%). Year-to-date, MU has declined -38.11%, versus a -13.15% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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