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What Price Ratios Say about Micron’s Stock Valuation

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Dec. 4 2020, Updated 10:52 a.m. ET

Price-to-earnings ratio

Micron Technology (MU) stock has grown significantly over the last 12 months. Despite that, the stock’s appreciation is lagging behind its earnings growth. That’s apparent from its price ratios.

A company’s PE (price-to-earnings) ratio tells us the amount investors are willing to pay per dollar of EPS (earnings per share). A forward PE ratio is based on analysts’ EPS estimates for the next four quarters.

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Micron is currently trading at a PE ratio of 54.6x, but the EPS estimates for the next year have put its forward PE ratio at 6.0x. That’s far below Intel’s (INTC) and Western Digital’s (WDC) forward PE ratios of 12.0x and 7.4x, respectively. A low PE ratio indicates that the company is doing better than its past trends. That’s true in Micron’s case since its EPS is expected to rise from $0.06 in fiscal 2016 to $4.28 in fiscal 2017 and $5.13 in fiscal 2018.

The low PE ratio indicates that there’s a lot of room for Micron stock to rise in the next 12 months.

Price-to-sales ratio

A company’s PS (price-to-sales) ratio tells us the amount investors are willing to pay for every dollar of a company’s sales. Micron had a PS ratio of 2.34x as of June 19, 2017. That metric is lower than Intel’s ratio of 2.76x but higher than Western Digital’s ratio of 1.45x. Investors are more optimistic about Micron’s future sales than Western Digital’s since Micron is at the peak of its 3D NAND business, while Western Digital is still transitioning to 3D NAND.

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Price-to-EBITDA ratio

A company’s EBIDTA (earnings before interest, tax, depreciation, and amortization) shows the outcome from its operating decisions. Micron’s and Western Digital’s price-to-EBITDA ratios were 7.38x and 7.7x, respectively, as of June 19, 2017. Their ratios are higher than Intel’s at 7.12x. Memory makers are operating at a higher margin than Intel since memory prices are rising and the cost of production is falling. However, that trend may reverse when memory prices begin to fall.

Price-to-FCF ratio

A company’s price-to-FCF (free cash flow) ratio tells us the amount investors are willing to pay for every dollar of FCF. Micron’s price-to-FCF ratio was -15.63x as of June 19, 2017, since it reported negative FCF in three of the last four quarters due to high capital expenditure and low margins. It returned to positive FCF in fiscal 2Q17. That’s likely to rise in the coming quarters, pushing the ratio to positive.

The price ratios show that Micron stock is undervalued and has a strong growth potential in the coming quarters. In the next part, we’ll look at Micron’s stock trend through technical indicators and see in which direction investor sentiment is skewed.

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