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Interpreting Micron’s Price Ratios in Light of Cyclicality

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Understanding Micron’s price ratios

Micron Technology (MU) improved its fundamentals over the last two years, when the memory market was in an uptrend. At that time, its stock rose significantly, and so did its valuation.

A stock’s fundamental value is determined by its price ratios, which are calculated by dividing its current price by its fundamentals, such as sales, earnings, and cash flow.

Going by the standard understanding of price ratios, Micron stock was cheaper even during its uptrend, as investors were cautious about the risk of a downturn. Because the stock is cyclical, its fundamentals will fall in a downturn and rise in an upturn, and its rates of decline and growth will be higher than those of noncyclical stocks. Hence, a stock like Micron will always be valued lower than its fundamentals, as the risk of a downturn has to be discounted.

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 its sales. Micron’s sales are a product of ASP (average selling price), sales volume, and product mix. Unlike its customers Intel and NVIDIA, Micron doesn’t have control over its ASP, and it doesn’t report steady sales growth every year, so its PS ratio is always lower than the average in the semiconductor industry. Over the last 12 years, Micron’s PS ratio has reached as high as 2.55x, lower than Intel’s and NVIDIA’s PS ratios of 3.56x and 8.84x, respectively.

In the last industry downturn in 2016, Micron’s PS ratio fell to 1.4x on July 31, 2016. The stock fell close to this level—to 1.49x from 2.13x—on July 31, 2018, as the industry saw a cyclical and macroeconomic downturn. Similar was the case with Western Digital (WDC) and Seagate (STX), which were trading at PS ratios of 0.74x and 1.2x, respectively, on March 14, 2019.

Wall Street analysts expect Micron’s fiscal 2019 revenue to fall 17.8% and WDC’s revenue to fall 19.4% YoY (year-over-year). While Micron looks cheaper than Intel and NVIDIA, it looks more expensive than Seagate and WDC. However, its earnings and cash flow ratios paint a different picture. We’ll take a look at this picture in the next article.

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