Micron Stock Could See Further Downside This Year

Micron Technology stock (NASDAQ: MU) is down 16% since the beginning of this year, but at the current price of around $45 per share, we believe Micron’s stock is fully valued.

Why is that? Our belief stems from the fact that Micron’s stock remains about 10% higher than the low seen at the end of 2017. Our dashboard What Factors Drove 10% Change In Micron Technology Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Micron is a leading DRAM and NAND memory manufacturer, whose products are used by most major memory device manufacturers in their flash and hard drives. Some of the price rise of the last 2 years is justified by the roughly 15% growth seen in Micron’s revenues from 2017 to 2019, which translated into a 25% growth in Net Income. Micron saw a 50% growth in revenue and an 85% jump in net margins in 2018, due to higher selling prices for its latest memory chip technology. However, the semiconductor supply glut in 2019 led to a 25% drop in revenue, and sent earnings margins back to 2017 levels.

Finally, Micron’s Price-to-Earnings (P/E) ratio rose from 9x at the end of 2017 to 9.5x at the end of 2019. The P/E dropped to 3x in 2018 due to a drop in semiconductor and memory demand, but as the supply glut started clearing out and demand started improving, the P/E rose to 9.5x by the end of 2019. While its P/E has dropped to 8x so far this year, given the volatility of the current situation, there is significant possible downside for Micron’s current multiple, especially when compared with previous years: 6x at the end of 2015, and 3x as recently as 2018.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus has meant there is much lower demand for computing devices across all markets, which means lower memory device demand, and hence lower demand for Micron’s products. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. Further, the lockdowns due to Covid have quickened the shift to cloud storage and streaming services, with more and more people making the shift from physical to cloud storage for better and easier accessibility and reliability. This shift will continue hurting demand for Micron’s products in the medium term. We believe Micron’s Q4 results at the end of September will confirm the hit to its revenue. It is also likely to accompany a lower 1H 2021 guidance.

Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/E decline from the current level of 8x to around 7x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $39.

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