20% Downside For Micron Technology Stock?

Micron Technology stock (NASDAQ: MU) is up 16% since the beginning of this year, but at the current price of around $63 per share, we believe that Micron stock has more than 20% potential downside.

Why is that? Our belief stems from the fact that Micron stock is still up almost 100% from the low seen at the end of 2018, almost 2 years ago. Further, after posting weak Q4 2020 numbers, and with demand still not up to pre-Covid levels, we believe Micron’s stock could drift lower. Our dashboard What Factors Drove 96% Change In Micron Technology Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Micron stock’s rise since late 2018 came despite a 30% drop in revenues, which combined with a 4% drop in the outstanding share count, led to a 27% decrease in revenue per share (RPS).

In addition, Micron’s P/S (price-to-sales) ratio rose from 1.2x in 2018 to 2.6x in 2019, and has further jumped to 3.2x currently, in line with the rally in technology stocks. However, given Micron’s poor Q4 ’20 numbers and the slump in demand for hardware storage devices, there is possible downside risk for Micron’s multiple, especially when compared with previous years: P/S of 1.2x at the end of 2018 and 2.6x as recently as 2019.

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

The global spread of coronavirus and the resulting lockdowns have led to a rise in online activity as more and more people have started working from home. With streaming services seeing a surge in demand and people relying more and more on cloud storage, demand for physical storage devices has taken a hit. This is evident from Micron’s full-year 2020 earnings, where revenue came in at $21.4 billion, down from $23.4 billion for 2019. Further, a rise in COGS and operating expenses meant that net profit dropped from $6.3 billion to $2.7 billion, driving EPS down to $2.42. With cloud storage getting more and more sophisticated, the reliance on physical storage will continue to drop in the near-to-medium term, hampering demand for Micron’s NAND and DRAM memory products.

Additionally, 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 3.2x to around 2.6x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $50, a downside of around 20% from the current price of $63.

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