Should Investors Consider Buying Micron Technology, Inc. (MU)?
Most DRAM and NAND memory chipmakers have suffered their worst year in 2015. Shares of most of the companies in the sector were steeply down including Micron Technology, Inc. (NASDAQ:MU) which lost two-third of its value in the last twelve month period. That raises a few questions. Has the memory chip market gone to such a low level? There was no doubt that the current supply exceeded demand because of the continued pressures from desktop PCs shipments. Though the chip faces pressures from the mobile segment too currently, it is quite likely that it would not remain the same forever. That was because there is a lot of Internet of Things (IoT) to come. Therefore, the potential use of other areas is still to be tapped. The current price level can be termed as bottomed out since there are likely to gain in the coming years.
New Technologies To Slash Manufacturing Costs
Micron Technology, Inc. (NASDAQ:MU) is not ready to lie down and raring to come back with a bang. One such reason for optimism was the focus towards new technologies. The chipmaker was ramping up the brand new tech with a clear-cut objective to cut down the manufacturing expenses for both NAND, as well as, DRAM memory products. Additionally, the company is expected to add about $1.4 billion per year to its operating cash flows from the recently disclosed reorganization of its Inotera alliance. It was a well-known fact that the PC industry has not been the demand driver for memory chip makers in the recent years. Therefore, the continued weak demand was never a reason for the current woes.
The current slowdown in the demand is due to the slower growth in mobile computing products. However, Micron Technology, Inc. (NASDAQ:MU), as well as, other memory chip makers were expecting some turnaround of fortunes. One of the reasons is that t Internet usage is getting wider and wider like IoT. As it expands the adaptability and penetration level, the demand for memory chip should also get a boost. Therefore, the next five-year period should see an increased level of IoT, as well as, increasing computerization of cars. That meant the current situation cannot last forever, and that itself should be a catalyst to buy the stock at the current levels to realize bigger gains.
Institutional Investors Add Stake
Another favorable factor that investors can look at is that the institutional investors were adding stakes in Micron Technology, Inc. (NASDAQ:MU) stock. For instance, Amerigo Asset Management has more than doubled its position in the fourth quarter following the purchase of about 5.74 million shares in the December quarter. Similarly, Mackay Shields acquired 414,000 shares to take its total to 40.38 million shares. The weak stock price induced Acadian Asset Management to buy 405,652 shares to take its total to 426,769 shares. Factory Mutual Insurance Company has purchased an additional 80,000 shares in the fourth quarter to take the total to about 2.16 million shares at the end of the quarter.
Aside from these institutions, Verde Servico Internacionais took a fresh position in Micron Technology, Inc. (NASDAQ:MU) that was worth approximately $305 million. These financial institutions were not acquiring the stock simply because they have cash at their disposal. At least two factors obviously drove them. One was the expectation that the DRAM, as well as, NAND memory chip, would see the reversal of fortunes in the next few years. The second factor was that if the company turns out to be a potential acquisition candidate, then it would command a better premium than the current market price. That is another catalyst to buy the stock.
First Half Will Be A Tough One
While there was optimism showing the brighter side of the stock, there were also skeptics who are bringing back the memory of 2012 when Micron Technology, Inc. (NASDAQ:MU) shares reached a record low of $6. Even now also, there are investors, who believe that the stock has the potential to hit a minimum of $6 since it was this price at which the stock bottomed out in 2012. According to Morgan Stanley (NYSE:MS) analyst, Joseph Moore, the stock has already been approaching the same valuation on enterprises value versus sales, P/B, and the trailing profit earnings ratio. That meant the first half would be a rough weather for the chipmaker, and the fundamentals are not likely to support it either.
However, the second half can prove to be crucial for Micron Technology, Inc. (NASDAQ:MU). That is because the industry is likely to have the recovery in the second six-month period of the current year. Moore also sees an improvement in the same period. His assumption was based on the spot market witnessing stability. That suggested that there was nothing to panic in the market, and, at the same time, does not provide any weakness to develop in the near-term. Moore also sees cost structure to enhance its recovery from the May quarter significantly. It was because of the improvement and cost structure, Morgan Stanley (NYSE:MS)’s Moore has not only maintained his rating of Overweight but also kept a price objective of $18 on the chipmaker’s share.
Valuation Demand Higher Price
Some of the valuation metrics point out that Micron Technology, Inc. (NASDAQ:MU) has the potential to grow merely on valuation. For instance, its P/E ratio was only 5.7 times compared to the S&P 500’s 19.0 times while price to book ratio was only 1.3 compared to the broader index’s 2.7. Similarly, price to sales ratio was 1.0 times compared to the S&P 500’s 1.8 times. Price to cash flow was also lower at 3.2 than the benchmark index’s 11.5 times.
Though the memory chipmaker might face some pressure in the upcoming quarters, it is quite likely that the trend will reverse. It is better to buy Micron Technology, Inc. (NASDAQ:MU) shares before sentiment changes. The current valuation supports a higher price from little to no growth apart from an expected gain in cost structure.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
Latest posts by Viraj Shah (see all)
- Tesla Motors Inc (NASDAQ:TSLA)’s Elon Musk Is Going After Semi Truck Industry - November 17, 2017 04:37 AM PST
- Tesla Motors Inc (NASDAQ:TSLA) Is Not “Hotbed for Racist Behavior” - November 15, 2017 06:58 AM PST
- Nikola Tesla and Tesla Motors Inc (TSLA) – The Past & Future of the World You Cannot Ignore- Part 1 - May 15, 2017 05:11 AM PST