Micron has a good long-term history that trades cheaply


Micron (MU) – Get Report was one of the first major US companies to report coronavirus in the environment Wednesday after the shutdown.

He is led by a very strong management team focused on increasing shareholder returns. although it is plagued by poor short-term visibility after the current quarter, its third fiscal quarter. However, too much negativity is already a foregone conclusion in this title, with stocks down more than 20% last month (including the recent recovery). Right now is an exceptional opportunity to consider Micron.

Very noisy driving

Micron has a leading position in the memory and storage sector, with strong secular rear winds on the back. However, given the current coronavirus outbreak, it has very poor visibility on operations after the third fiscal quarter of 2020, as its operations are lagging behind indicators in the sector. Put another way, customer purchases in this quarter and the following had already been contracted previously.

Micron’s exposure to the main verticals is as follows:

  • ~ 27% to servers
  • ~ 25% cell phones
  • ~ 20% PC
  • ~ 20% automotive, includes industrial and other applications

In the current home-based work environment, Micron’s customers have increased demand for cloud storage solutions and employees and students have increased their demands for home and business notebooks, so this quarter’s performance is likely to improve.

At the same time, however, phone manufacturers have significantly slowed production in the face of logistical disruptions and declining consumer confidence as many consumers lose their jobs and enter a global recession.

As a result, it offered very choppy driving as Micron’s short-term performance is uncertain, even by Micron standards.

What about its long-term potential?

The demand for storage and memory solutions will increase over time. As consumers and businesses continue to consume content and data, storage demand will provide a very long secular wind for Micron.

Furthermore, although Micron has some cyclical elements, over time, the current cycle will be less pronounced than the previous drops in the memory cycle of the 2000s and recently witnessed in 2016.

The demand for smartphones, servers, the cloud, the automotive industry, consumer electronics, games and IoT (Internet of Things) with 5G capacity will not suddenly decrease.

As a reminder, Micron derives nearly 65% ​​of its total revenue from its DRAM segment. DRAM is faster, denser and more expensive. But given the number of gigabytes per dollar it stores, DRAM becomes quite inexpensive for companies that require extended storage solutions.

DRAM is produced by only three companies worldwide. As a result, even though it is a staple product, it is still capable of making huge rewards.

When will Micron’s cycle turn?

It often seems that Micron’s upcycle is expected to be just around the corner, however, it never seems to come completely. Currently, Micron is experiencing a global recession caused by the coronavirus epidemic.

That said, Micron’s fiscal Q3 2020 points to the midpoint (of a very broad orientation range) towards $ 4.9 billion in revenue. This would imply that its revenue would decrease by 16% each year.

However, in sequence, this would lead to a small improvement compared to the second quarter of 2020. Currently, I believe that investors are optimistically picking up on the positive news emerging from companies that should not reduce operations following the outbreak of the coronavirus.

On the other hand, Micron noted several times during its investor call that the company is a lagging indicator, which means that a decline in consumer sentiment globally has not yet been reflected in its prospects.

Does this mean that fiscal Q4 will be a challenge for Micron?

This certainly seems to be the case. Micron notes that many customers are purchasing bulk storage components to avoid possible logistical disruptions, creating increased demand.

However, as companies accumulate inventories, this implies that there will be an overabundance along the way, which will depress future sales for Micron, possibly starting in the fourth quarter of 2020.

Evaluation – Huge huge potential

I argue that Micron is currently worth a market capitalization of $ 90 billion versus $ 50 billion, or at least 60% more.

1) The demand for memory in servers, clouds, 5G, machine learning and autonomous vehicles will only increase, will not decrease. Therefore, there is a strong age-old secular wind in its operations.

2) During this recession, Micron should still be profitable, which represents a significantly improved situation compared to the last recession of 2016.

3) Given a more normalized environment like in 2018-2019, with constant DRAM prices, Micron could go back to making $ 9 billion in free cash flow. Without any heroism, this company could trade a 10x to FCF (not earnings, but a clean free cash flow, which is rated significantly higher).

I can’t see how these combined aspects shouldn’t impose a 10x multiple on the normalized free cash flow.

The bottom line

Although Micron’s fiscal Q3 2020 seems reasonable, Q4 2020 may be suboptimal compared to previous expectations that Micron would begin to rise in the memory cycle.

However, I continue to believe that in the long run, Micron will deliver strong returns to shareholders once the coronavirus pandemic is over.

Disclosure: the author holds a long position in Micron