Is Micron undervalued?
Micron Technology’s (MU) earnings outperformed analysts’ estimates by huge margins in 2017, pushing the company’s stock price up ~90%. Despite such strong growth, Micron’s PE (price-to-earnings) ratio was lower than the industry average, indicating that the stock was an attractive investment and had strong growth potential.
But is PE ratio the right metric by which to value a cyclical stock such as Micron?
Is PE ratio the right metric for Micron?
Micron’s PE ratio is currently low because it’s been calculated using its peak EPS (earnings per share) and its earnings are not sustainable. If we remove the effects of cyclicity and consider the company’s average EPS of the last five years, Micron’s PE ratio comes in at 23x. For this reason, we can determine that the PE ratio is not the right metric by which to value Micron’s cyclical stock.
Even NVIDIA’s (NVDA) price ratios show that its stock is overvalued, but investors continue to enjoy capital gains. Why? NVIDIA is a growth stock, and its stock price is influenced more by its future growth opportunities than what it has already achieved. However, price ratios are a good measure for stocks such as Intel (INTC) and Qualcomm (QCOM), for which price growth largely depends on earnings growth.
Let’s take a look at some other price ratios to understand Micron’s actual valuation.
Other price ratios
Micron’s PS (price-to-sales) ratio of 2.3x is higher than the industry average of 2.2x, and its PB (price-to-book) ratio of 2.3x is slightly lower than the industry average of 3.0x. If Micron were a cheap stock, these two ratios would be near their historical lows, but that’s not the case.
Micron’s 2017 PS ratio of 2.3x was slightly lower than its 2014 PS ratio of 2.6x (when the company was enjoying a DRAM market upturn) but higher than its 2016 PS ratio of 1.8x (when the company faced a DRAM downturn). Similarly, its 2017 PB ratio of 2.3x was lower than its 2014 PB ratio of 3.5x but higher than its 2016 PB ratio of 2.0x.
These metrics show that Micron stock is not as cheap as it appears but not as expensive as its previous uptrends. Even if investors buy the stock at its current valuation, they could enjoy some capital gains.