My calls on Micron (NASDAQ:MU) have been ill-timed. That's in part due to my lack of skill as a market timer, and, in part, due to the swinging nature of the stock and its underlying business. The catalyst for this stock has been changing expectations on future memory prices and suffice to say that it has not been a constant variable. However, I see Micron as the archetype of an overlooked growth stock.
Source: Intel 10-K
Time and again, investors have been burned by the wild swings in the company's stock price. Additionally, Micron's share price has struggled to pass the 60 USD level. Therefore, investors have shrugged off this stock on the account of cyclicality and expectations of weakening memory prices.
As an aside, Intel (INTC) comes as the perfect example of a company that was constantly criticized, back in 2015, for being too dependent on the personal computer industry, and for having lost the mobile phone train, but the reality is that in the process it nearly doubled its market capitalization.
Intel Stock Price 5Y
Source: Seeking Alpha
Micron is growing at a fast clip; however, market analysts and pundits tend to dismiss it at the first opportunity. But, that per se, is not new, nor exclusive to Micron. What makes it interesting is the fact that Micron is right in the middle of the data megatrend. And, if data trend jargon seems too holistic for you, just think that what is really driving data are the applications to AI, machine learning, IoT, among others, that are using data to reinvent old industries. Micron provides exactly what data needs: memory, more specifically, fast and reliable memory.
Micron's most consolidated markets in the computer and networking segments include clients among individuals, enterprises, organizations operating with high-performance graphics, and cloud servers. In the mobile segment, the company provides several memory and performance solutions for smartphones.
However, the best part lies in new solutions in development for upcoming markets. These include:
Most of these applications are still in their infancy with a huge way to go before being profitable, while others are maturing as we speak. Now, we shouldn't be too optimistic, there's lots of competition, and Micron will just grab a fraction of the total addressable markets. However, that's exciting enough.
If there is intense completion from the likes of Toshiba (OTCPK:TOSYY), Western Digital Corporation (WDC), Samsung (OTC:SSNNF), Seagate (STX), and Intel (INTC), among others, the company needs to have an edge to succeed. That edge has to come from two fronts: technology development and manufacturing efficiency. Let's focus on the latter.
The company has a worldwide manufacturing base. The production of semiconductors depends on maintaining a highly controlled production space that minimizes contamination. The manufacturing costs depend, among others, on the speed of the transition to higher density products and the sophistication of the manufacturing equipment and processes.
For investors, more than dense technicalities, what matters is the profitability and the sustainability of the operations. In that regard, Micron has maintained incredible gross, operating, and profit margins. All that despite periodical price drops in memory prices, as we have seen previously. These levels of profitability are only possible due to the increasing manufacturing efficiency and productivity, both offsetting the drops in price.
(Source: Author computations based on Micron 10-K)
Comparing companies based on these ratios is never straightforward, mainly because of differences in accounting practices. However, we can apply a forensics approach to financial statements and derive some clues. To smooth cyclicality, let us use three-year averages to compute gross margins.
3-year average gross margins for Micron, Intel, Western Digital and Seagate
(Source: Micron 10-K, Seeking Alpha's Financials data, Author's computations)
More than comparing apples to oranges, the interesting part is comparing the trendline for each company. Micron has come a long way, from being a small player with razor-thin margins, to having great margins. Now, let us see how that translated into the bottom line.
3-year average profit margins for Micron, Intel, Western Digital and Seagate
(Source: Micron 10-K, Seeking Alpha's Financials data, Author's computations)
Here we can see that the improvements in Micron's margins weren't just an accounting gimmick. It materialized all the way down into the bottom line. This is what it looks like when technology improvements meet manufacturing excellence. The company has grown in size and got more efficient at the same time.
(Source: Micron 10-K, Seeking Alpha's Financials data, Author's computations)
That's the hardest question, and usually, financials do not provide much insight on this regard. We can form a thesis that if the company was able to gather a pool of talented people and resources that allowed it to get to this point, then, as long as they keep investing, the company will carry the momentum forward.
Source: Micron's 10-K
Don't read too much into these figures. They are just indicative that the company is keeping its investment levels. However, if we add the fact that Micron is navigating a mega-trend towards more data storage and processing, we feel inclined to believe that the company will carry the momentum forward.
The company is in great shape, with a lean cost structure, as evidenced in its margins, and with a strong balance sheet.
Source: Micron's 10-K, Author's computations
Micron is in great shape to contribute with memory and storage products to the next wave of artificial intelligence and machine learning technology development. In addition to the current line-up of products and services, the company has the balance sheet to go after strategic acquisitions, as they did with Inotera in 2016.
All-in-all, Micron has great momentum in its operations, it has achieved an impressive scale, and it is right at the center of some of the most promising industries for the next decade: artificial intelligence and machine learning. Trading at around 12 times its 5-year average EPS (5-year average EPS: $4.73), the company seems very attractive for a buy-and-hold investor.
Disclosure: I am/we are long MU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This text expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, wherever there is the potential for profit there is also the possibility of loss. Additionally, the present article is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Some information and data contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. The author trusts that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.
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Ride The Tiger: Micron Is Positioned To Become A Powerhouse - Seeking Alpha
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