Is Micron Technology Stock a buy it now?

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Micron Technology (MU 4.99%) released a messy earnings report on Sept. 29. For the fourth quarter of fiscal 2022, which ended Sept. 1, the memory chipmaker’s revenue fell 20% year-over-year to $6.64 billion, missing estimates $140 million and ending its nine-quarter revenue growth streak. Its adjusted net income fell 42% to $1.62 billion, or $1.45 per share, but still beat consensus guidance by eight cents.

For the first quarter of fiscal 2023, Micron expects its revenue and adjusted EPS to fall approximately 45% and 98% year-over-year, respectively. Analysts had only expected its revenue and profit to decline by 26% and 67%, respectively.

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Those numbers were dismal, but Micron’s shares held fairly steady after the report. That’s likely because its shares are already down nearly 50% this year as investors brace for a cyclical dip in memoir prices. So, should investors finally buy shares of Micron before the memory market rallies?

Why is Micron a cyclical stock?

In fiscal 2022, Micron generated 73% of its revenue from DRAM chips, 25% from NAND (flash) chips, and the remainder from other types of memory. Micron isn’t the world’s largest producer of DRAM and NAND chips, but it makes chips that are denser (and therefore more power efficient) than its biggest South Korean competitors. Samsung and SK Hynix.

This technological superiority, along with the fact that it does not dabble in non-memory markets like most of its competitors, makes Micron a “pure play” in the secular growth of the memory chip market. But it also means that Micron is more directly exposed to cyclical memory prices than its industry peers.

Micron saw its last cyclical decline from 2019 to 2020, when memory chipmakers produced too many chips for slowing smartphone and PC markets. This glut of supply caused memory prices to plummet, and many customers began stocking up on these cheap memory chips as the pandemic worsened – prolonging the downturn even as Micron and other major chipmakers have limited their production of new chips.

But starting in the second half of 2020, memory prices rebounded as new 5G devices hit the market, PC sales accelerated as more people worked from home and data centers data have upgraded their infrastructure to cope with the growing use of cloud-based services. This two-year growth spurt has boosted Micron’s revenue, but also prepared it for tough year-over-year comparisons in a post-pandemic market. Macroeconomic headwinds also exacerbated this cyclical downturn.

How long will this economic downturn last?

Micron’s revenue grew another 11% in fiscal 2022, with double-digit DRAM and NAND revenue growth as its non-GAAP (generally accepted accounting principles) gross margin reached a peak in three years.

Period

FISCAL YEAR 2022

FISCAL YEAR 2021

FISCAL YEAR 2020

DRAM Revenue Growth (YOY)

12%

38%

(14%)

NAND Revenue Growth (YOY)

11%

14%

14%

Total revenue growth (YOY)

11%

29%

(8%)

Gross margin*

45.9%

39.7%

31.3%

Data source: Micron. YOY = year after year. * Non-GAAP.

Unfortunately, its gloomy forecast for the first quarter of 2023 indicates that its cyclical downturn has only just begun. In its fourth quarter presentation, it warned that an “unprecedented confluence of macro events and customer inventory adjustments is driving demand for DRAM and NAND well below end-use consumption” in an “environment extremely aggressive pricing.

As a result, Micron expects “industry supply growth to significantly outpace demand growth” throughout calendar year 2022, which will likely result in “stock very high vendors for DRAM and NAND chips”. However, it expects this to improve in calendar year 2023 as its demand growth begins to outpace its supply growth in both markets.

Once again, Micron and its industry peers are trying to redress this balance by limiting their production of new chips. As revenue growth temporarily stagnates, Micron remains committed to returning 100% of its free cash flow (FCF) – which grew from $2.8 billion in fiscal year 2021 to $3.2 billion. dollars in fiscal year 2022 – to its investors through redemptions and dividends.

Is Micron an undervalued chip stock?

Micron investors should prepare for at least a few more quarters of declining revenue and earnings. For now, analysts expect its revenue and adjusted earnings to fall 23% and 64%, respectively, in fiscal 2023. Those estimates may need to be lowered further after first-quarter estimates of Micron have largely missed Wall Street’s expectations.

However, they also expect its revenue and adjusted EPS to start growing again in fiscal 2024 when this cyclical downturn ends. We should take these expectations with a grain of salt, but they suggest Micron’s stock is deeply undervalued at just six times future earnings. Its 0.9% forward dividend yield won’t appeal to serious income investors, but it’s still a nice bonus for patient investors who are prepared to ride out cyclical headwinds.

Micron’s stock will remain under heavy pressure in this tough market, but its technological superiority, financial stability and low valuations should limit its downside potential until the DRAM and NAND markets recover.

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