What’s The Downside For Micron Stock?

MU: Micron Technology logo
Micron Technology

Micron Technology stock (NASDAQ: MU) is down around 6% since the beginning of this year, but at the current price of around $51 per share, we believe that Micron stock could see more downside.

Why is that? Our belief stems from the fact that Micron stock has jumped 1.6x from the low seen at the end of 2018, almost 2 years ago. Our dashboard What Factors Drove 59% Change In Micron Technology Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

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Micron Technology is a memory semiconductor manufacturer, providing NAND and DRAM components to all leading HDD and flash memory manufacturers. The stock rise over the past year and a half came despite a 30% drop in revenue. Revenue dropped from $30.4 billion in 2018 to $23.4 billion in 2019 as the semiconductor supply glut led to a drop in selling prices. Revenue further fell to $21.4 billion in 2020 (Micron’s fiscal year ends in August), as the pandemic hurt memory component sales. Further, net income dropped from $14.1 billion in 2018 to $2.7 billion in 2020. The drop in revenue, combined with a rise in COGS, led to a slump in gross margins (59% in 2018 to 46% in 2019 and finally to 30.5% in 2020). This drop in net income heavily outweighed the 4% drop in share count, leading to an 80% drop in EPS.

In addition, Micron’s P/E ratio rose from 2.6x in 2018 to 9.5x in 2019, but has since jumped to 21x currently. However, given the volatility of the current situation, there is significant possible downside risk for Micron’s multiple, especially when compared with previous years: 7x in 2017, and 9.5x as recently as late 2019.

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

The global spread of Coronavirus and the resulting lockdowns have hurt external memory device demand by quickening the shift to cloud storage and streaming services, with more and more people moving from physical to cloud storage for ease of access and better reliability. Micron’s 2020 results confirmed this, as revenue came in at $21.4 billion vs $23.4 billion in 2019. Further, a rise in COGS and operating expenses led to a drop in EPS from $5.67 in 2019 to $2.42 in 2020. We believe the shift to cloud storage will continue hurting demand for Micron’s products in the medium term.

Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/S multiple decline from the current level of 21x to around 15x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $35.

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