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Micron Stock: A Target Price and Valuation Update

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Oct. 1 2019, Published 8:30 a.m. ET

Micron (MU) stock is cyclical. It soars in an upturn and falls in a downturn. In the last upturn period, which lasted for two years, Micron stock surged 570%. The stock is currently in a downturn and fell around 50% from June last year to June this year. However, the stock rallied 50% only in the three months from July 25 to September 25, which signals that an upturn is coming.

Micron stock was down 0.83% on September 30 and closed the trading day at $42.85. The stock was trading 16.6% below its 52-week high of $51.39. Meanwhile, it was trading 50.9% above its 52-week low of $28.39. As of September 30, Micron had a market cap of $47.7 billion.

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YTD (year-to-date), Micron has gained around 35.1%. Micron stock has outperformed many of its peers and the broader market. The S&P 500 gained 18.7% this year. Micron’s peers NVIDIA (NVDA), Intel (INTC), and Broadcom (AVGO) have returned 30.7%, 11.9%, and 9.54%, respectively, this year. Peers Advanced Micro Devices (AMD), Marvell Technologies (MRVL), and Qualcomm (QCOM) have outperformed Micron with gains of 57.0%, 54.7%, 36.8%, respectively. The VanEck Vectors Semiconductor ETF (SMH) is up 36.5% YTD.

Micron’s fourth-quarter results

Micron reported upbeat fourth-quarter earnings results on September 26, but its stock fell 11% on trade war fears. Investors were also disappointed by its weak fiscal 2020 first-quarter guidance. Micron expects 2.7% sequential revenue growth in the first quarter but expects its earnings to fall 18% sequentially.

During the quarter, Micron’s CEO, Sanjay Mehrotra, confirmed that the memory chip market was likely to revive. He stated, “We are encouraged by signs of improving industry demand, but are mindful of continued near-term macroeconomic and trade uncertainties.”

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Analysts are also upbeat on the recovery in chip demand. However, Micron’s exposure to China amid the escalating US-China trade war fears remains a concern. The trade ban on Chinese tech giant Huawei has significantly dented Micron’s sales in the first half of fiscal 2019. Expectations of the US and China reaching a trade deal could boost the stock.

Micron’s NAND (negative-AND) average selling price fell 8% sequentially in the fourth quarter. The selling price of DRAM (dynamic random-access memory) plunged 20% sequentially in the quarter. Meanwhile, the company expects the DRAM and NAND demand to improve in the second half of 2019 compared to the first half.

However, according to Raymond James analyst Chris Caso, the DRAM market might not recover significantly until the second half of 2020. The analyst believes that the DRAM price improvement will come in the second half of 2020 amid excessive inventory and seasonality issues. This means that lower DRAM prices through the first half of 2020 will delay margin recovery, hurting margins and thereby earnings.

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Analysts’ recommendations and target price

Among the 34 analysts covering Micron stock, 20 have “buy” ratings—up from 19 last month. About 11 analysts have “hold” ratings on the stock—down from 12 last month. Only three analysts have “sell” ratings on the stock—unchanged from last month.

Currently, Micron analysts have placed a 12-month target price of $54.48 on the stock. On September 30, the stock was trading at a discount of 21.3% to analysts’ 12-month target price. Its median target price was $55.00 on the same date.

Technical level

With a 14-day RSI (relative strength index) score of 33.9, the stock is approaching the oversold level. An RSI reading of above 70 indicates that a stock is in “overbought” territory, while an RSI level of below 30 means that a stock is in “oversold” territory.

On September 30, Micron stock closed near its Bollinger Band lower-range level of $44.05, which indicates that it’s been oversold.

Micron’s valuation

Micron’s revenue will likely fall 11.7% to $20.7 billion in fiscal 2020. Its sales will likely improve significantly by 20.7% to $24.9 billion in fiscal 2021. Analysts also expect its adjusted EPS to fall around 60% in fiscal 2019. However, they expect its earnings to see growth of over 100% in fiscal 2021. We believe chip pricing will mostly recover in fiscal 2021, boosting earnings growth.

However, the stock appears expensive, with a PE ratio of 16.9x and a projected earnings decline rate of 60% year-over-year for fiscal 2019.

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