Weak Demand Could Weigh On Micron Technology Stock

Micron Technology stock (NASDAQ: MU) is up almost 70% since the beginning of this year, and at the current price of around $90 per share, we believe that Micron stock has around 20% potential downside.

Why is that? Our belief stems from the fact that Micron stock has rallied almost 3x from the low seen at the end of 2018, more than 2 years ago. Further, after posting mixed Q1 2021 numbers, and with demand still not up to pre-Covid levels, we believe Micron’s stock could drift lower. Our dashboard What Factors Drove 187% 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 an 8% drop in revenues from $23.4 billion in FY 2019 to $21.4 billion in FY 2020. Rising expenses saw net margins drop by more than 50% from 27% in FY 2019 to 12.5% in FY 2020, causing net income to drop almost 60%. This, combined with a roughly unchanged outstanding share count, led to a 57% decrease in earnings per share (EPS).

In addition, Micron’s P/E (price-to-earnings) ratio rose from 6x in 2018 to 22x in 2019, as the semiconductor supply glut cleared out, implying a rise in demand. The multiple has further jumped to 38x currently, in line with the rally in technology stocks. However, given Micron’s recent run of poor earnings 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/E of 6x at the end of 2018 and 22x 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 past few earnings reports. Revenue for full-year 2020 came in $21.4 billion, down from $23.4 billion in FY ’19. A significant jump in COGS and operating expenses saw operating margins drop to as low as 14%, a far cry from the 31.5% in FY 2019.

Further, Micron recently reported earnings for Q1 2021. where revenue came in at $5.8 billion, up YoY from $5.1 billion for the same period last year. COGS rose in line with revenue, but a drop in other operating expenses, saw operating income rise to $841 million, from $561 million in Q1 2020.

Micron’s operates in an industry characterized by gradually dropping selling prices, and the continued drop in sales volumes has hurt Micron’s margins. This is evident from Micron’s LTM revenues, which stand at $22.1 billion, only around 5% lower than the $23.4 billion in FY 2019. However, LTM EPS stands at $2.70, over 50% lower than the $5.67 in FY 2019.

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, in turn hurting the company’s margins as well.

Additionally, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/E multiple decline from the current level of 38x to around 30x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $75, a downside of almost 20% from the current price of $91.

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