The first thing many investors do is to look at the price of the stock. That is not the right way to do. Look at the historical fluctuations in the price that create many emotions for investors. Do not be biased, but let’s look at the historical price chart of a fast-growing memory business, Micron Technology (NASDAQ:MU).
Source: Google Finance
In the past year, Micron Technology’s share price has experienced a lot of volatility. It has advanced by more than 100% for a year. Many investors would wish to buy it last year, and they wonder where it will head to next year.
My advice? Forget this chart and look closely at the business to determine whether the company is cheap at this price going forward.
Industry consolidation and a huge demand is a good thing for the memory and storage business
Micron Technology focuses on memory and storage, which is quite capital-intensive. Historically, this was a cyclical industry, fluctuating widely with the economic trends. There was also a fierce competition in the market, with around 60 players. In the past two decades, major semiconductor companies’ EBIT rose and fell along with the economy boom-bust cycle.
Source: McKinsey & Company
Because of the huge competition in the marketplace, DRAM and NAND memory flash was considered a commodity and priced accordingly. The price difference was mainly based on the different in storage capacity. However, in the past several years, this industry has gone through a consolidation. In 1995, 10 players accounted for 80% of the total DRAM market, but by 2012, there are only three big companies left: Micron Technology, SK Hynix (OTC:HXSCF, OTC:HXSCL) and Samsung (OTC:SSNNF, OTC:SSNLF), accounting for more than 90% market. With few players in the market, the industry return on capital is improving; the three-year average industry ROI in 2017 has increased to 30%.
Source: Micron Technology Analyst & Investor Event, May 21, 2018
According to Micron Technology, the world has gone through the boom of the PC/Internet era with 250 billion GB created annually, the mobile era with 7,000 billion GB created annually. We are in the Data Economy, with 22,000 billion GB created in 2017. With the fast-growing trend of data usage in PC, mobile and other devices, it is expected that around 62,000 billion GB created in 2021. There is also the trend in Artificial Intelligence, using a huge amount of data in cloud data centers to teach machines to learn. In order to do that, we need a huge storage of data and a fast data processing time. The company says that the capital expenditure for cloud data centers will be around $108 billion, 2.6 times that in 2017. Artificial Intelligence training requires 6 times DRAM and 2 times SSD than the standard servers. Thus, the global demand for memory and storage is huge.
Focusing on product innovation to capture the wave of Artificial Intelligence
Micron Technology has been well prepared to meet with that huge demand in the future. It focuses on innovating its products and operational excellence to boost its profitability. Recently, the company has partnered with Intel (NASDAQ:INTC) to develop a unique technology called 3D XPoint, the non-volatile memory. 3D XPoint Memory products have higher memory capacity with 10 times denser than DRAM, 1,000 times higher endurance than NAND, and are 1,000 times faster than NAND. Thus, 3D XPoint is quite suitable for Artificial Intelligence, with Big Data and machine learning. The company expects 3D XPoint products will be launched in 2019.
In addition, Micron Technology has other innovative products, such as 3D NAND and NOR flash drives. 3D NAND has higher capacity than competing planer NAND technologies by stacking layers of data storage cells vertically to create storage devices. And NOR flash devices offer the fastest bootable memory solution. It is more reliable than other solutions because of the cell structure.
Healthy balance sheet and cheaply valued
Although it is a capital-intensive business, Micron Technology has managed to operate without leveraging the balance sheet. The debt is just around $8.2 billion, being offset by $8 billion in cash. In addition, the company produces a huge, growing cash flow. In the fiscal Q2 quarter, it generates $2.2 billion in just one quarter.
Let’s assume that in the next five years, Micron Technology’s free cash flow is growing 11% per year, equivalent to the company’s average historical 3-year free cash flow growth. After that, the free cash flow will grow 1% per year to perpetuity. The 2018 free cash flow is assumed to be equal to the trailing free cash flow of the past four quarters, for the sake of conservativeness. Factoring a $10 billion share buyback plan, at an average price of $65, the company can reduce its share count by nearly 154 million. Thus, the total share outstanding can be reduced to nearly 1.1 billion.
Annual FCF growth
Free cash flow ($ million)
Discounted FCF ($ million)
NPV ($ million)
Number of shares outstanding (million)
NPV per share
With the $10 billion share buyback, the conservative assumption has led us to the conservative valuation of $93 per share, 52% upside from the current trading price.
Short-term trading risks
Micron Technology’s share price has high historical volatility, so in the short run investors might experience downturns after it has run up a lot, but in a long run it should offer investors a good return.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MU over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.