We think that Micron Technology (NASDAQ:MU) currently is a better pick compared to Texas Instruments Incorporated (NASDAQ:TXN). Micron stock trades at under 4x trailing revenues, much less than TI’s 10x multiple. Does this gap in the companies’ valuations make sense? We don’t think so and we expect Micron to close this gap. While both companies have seen a steady rise in revenues since the lockdowns started being lifted, both have struggled equally over the past four fiscal years. Micron’s revenues first jumped sharply from $20.3 billion in FY ’17 (MU’s fiscal year ends in August) to $30.4 billion in FY ’18. However, the semiconductor supply glut then saw Micron’s sales drop to $23.4 billion in FY ’19 and further to $21.4 billion in FY ’20, before a sharp recovery to almost $28 billion in FY ’21. Likewise, TI’s sales rose to $15.8 billion in FY ’18 but came in at around $14.5 billion in both, FY ’19 and FY ’20. Like Micron, TI’s sales also witnessed a strong recovery, rising to $17.6 billion on an LTM basis. However, TI’s LTM operating margins currently stand at 47%, twice that of Micron’s 22.8%.
Having said that, there is more to the comparison, which indeed makes Micron a better bet than TI, especially at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth, as well as operating income and operating margin growth, along with the financial position. Our dashboard Micron Technology vs Texas Instruments Incorporated: Industry Peers; But Micron Technology Is A Better Bet has more details on this. Parts of the analysis are summarized below.
1. Micron Technology Is The Clear Winner On Revenue Growth
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- Why Has Micron Technology Stock Returned 2.5x Since 2018 Despite Stagnant Revenue Growth?
- Following Strong Earnings Release, Micron Technology Stock Looks Set To Extend Its Rally
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Both companies over the last three fiscal years, have seen dismal sales growth, of just under -1%. However, for the most recent quarter, Micron saw a QoQ rise in sales of 11.5% and a YoY rise of 36.6%, more than TI’s 1.4% and 21.6% respectively. Micron’s revenue growth on an LTM basis, too, stands higher at 29.3%, compared to TI’s 28.1%.
Additionally, Micron is a larger company than TI on the basis of sales, with the most recent FY’21 sales standing at $27.7 billion, higher than TI’s $17.6 billion LTM numbers (TI’s fiscal year ends in December, while Micron’s ends in August).
2. EBIT margins: TI Has Seen Stronger Growth
TI’s operating margins stand at 47% on an LTM basis, higher than Micron’s 22.8%. This reflects in the P/EBIT margins for both companies as well, with TI trading at a P/EBIT of 21.6x currently, vs Micron’s 15.1x.
3. Micron Ahead In Terms Of Expected Returns
Using P/S as a base, due to high fluctuations in P/E and P/EBIT, we figure Micron is the better choice. Micron’s LTM revenues of $28 billion are expected to rise at a CAGR of 18% as per our estimates, taking the revenue number three years out to as high as $46 billion. Assuming Micron’s P/S ratio to pull back to 3.1x from 3.4x over this period, we expect market cap in three years to expand to $141 billion, an upside of 47%.
In comparison, given historical trends we expect TI’s sales to rise at a conservative CAGR of 3.2%, taking revenue in three years to $19 billion. Considering P/S for TI, too, pulls back to 9.5x from 10.2x over this period, we estimate a market cap of $184 billion for TI, indicating an upside of just 2%.
The Net of It All
Micron’s revenues are much larger than that of TI, but the latter has a higher EBIT margin and a better cash cushion. However, our comparison of the post-Covid recovery above, shows that Micron has been performing better than TI lately. Given Micron’s P/S ratio of around 3x, compared to TI’s 10x, we believe that this gap could close. As such, we believe that Micron stock is currently a much better bet compared to Texas Instruments stock.
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|S&P 500 Return||-1%||24%||107%|
|Trefis MS Portfolio Return||-2%||42%||282%|
 Month-to-date and year-to-date as of 12/15/2021
 Cumulative total returns since 2017