MU Stock: Is This S&P 500 Giant a Buy Despite Morgan Stanley’s Downgrade?
August 23 2021 - 5:00AM
Finscreener.org
One of the best-performing stocks in the last decade has been
Micron Technology (NASDAQ: MU).
This semiconductor giant has returned close to 1,000% to investors
since August 2011, compared to the S&P 500 gains of 350%.
However, while the S&P
500 is trading at record levels, MU stock is down 26% from
all-time highs, providing investors an opportunity to buy the
dip.
According to a report from TheFly, Morgan Stanley analyst Joseph
Moore downgraded Micron stock from Overweight to Equal-Weight.
Moore also reduced the stock’s 12-month target price to $105 from
$75.
Moore explains the semiconductor industry might enter a downturn
over the next few months which might drag share prices lower. While
Micron has impressed analysts due to structural improvements over
the years, it might underperform the broader market if DRAM prices
start to decline going forward.
The analyst explained, “We were prepared to become more
constructive under the right conditions, but ultimately it is about
inflections in the cycle and trajectory of earnings estimate
revision breadth -- the former approaching an earlier peak YoY
pricing and latter approaching negative earnings risk that
follows.”
Last week Susquehanna also noted that the average order-filling
time for semiconductor companies touched a four-year high of 20.2
weeks as companies remain impacted by the ongoing pandemic.
Micron stock remains a long-term buy
While Wall Street is worried about an imminent downcycle that
will drag shares of Micron and its peers lower, long-term investors
should view the recent pullback as a buying opportunity. In the
fiscal third quarter of 2021, Micron sales were up 36.5% year over
year to $7.4 billion
above consensus estimates of $7.23 billion. Its adjusted net
income also surged to $1.88 per share in Q3, compared to the
consensus figure of $172.
The semiconductor heavyweight’s stellar quarterly results were
driven by strong memory demand and higher pricing. Sales from its
dynamic random access memory or
DRAM segment surged by 52% year over year and were up 23% on a
sequential basis. This segment accounted for 73% of total Micron
sales in Q3 while its NAND flash business that generated 24% of
total sales experienced a top-line growth of 9% year over year. An
improved pricing environment allowed MU to improve its gross margin
to 42.9%, up from 33.2% in the year-ago period.
Further, Micron expects revenue of around $8.2 billion in Q4
with adjusted earnings of $2.30 per share and a gross margin of
47%. In the Q4 of fiscal 2020, it reported gross margins of 34.9%,
and earnings of $1.08 per share, while sales stood at $6.06
billion.
We can see that Micron will more than double its profit margins
while sales might rise about 35% year over year, indicating the
company benefits from high operating leverage.
What next for MU stock?
Micron is a company with five primary business segments that
include data center, graphics, mobile, auto, and personal
computers. Most of these businesses are poised to experience
significant tailwinds in 202 and beyond. The data center segment
will drive demand for DRAM and SSDs or solid-state drives.
The growing demand for PCs will also boost demand for SSDs while
the transition towards 5G devices will positively impact mobile
sales. Further, according to a research report, automotive memory
demand is estimated to grow at an annual rate of 24% in the next
few years.
MU stock remains reasonably valued with a forward price to 2022
sales multiple of 2.16x and a price to earnings multiple of just
6.22x. Comparatively, its earnings are forecast to rise at an
annual rate of 64% in the next five years.
Analysts covering Micron stock have a 12-month average price
target of $117 which is 67% above its current trading price.
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