Micron Tech (MU), TP: $97, $108
What the company does
Micron Tech makes memory chips - DRAM (Dynamic Random Access Memory) and Nand flash memory. DRAM accounts for more than 70% of Micron Tech's revenue. DRAM functions as the key memory in PCs, laptops, smartphones and other electronic or electronic-related gadgets such as electric vehicles. Nand flash drives, on the other hand, provide longer-term storage.
Who are its competitors
DRAM: Samsung, SK Hynix
Nand flash: Western Digital, Intel, Samsung SK Hynix
Fundamental Analysis
Micron Tech's current PE (TTM) is 30.7 and its average PE (TTM) is 26.4. This may be expected to change (decrease) when its upcoming earnings report gives a clearer picture of the latest developments, particularly in terms of the semiconductor shortage we are seeing globally.
At the end of March, March 31st, Micron beat analysts' targets for its fiscal Q2, and MU soared 4.8% on the news release.
This is Micron Tech's fourth quarter of sales growth on a YOY basis, after five quarters of suppressed sales. Its earnings have risen for the third consecutive quarter, after six down quarters.
Significantly, in mid March, Micron indicated that it will stop developing 3D XPoint, which has low profit margins and has affected its earnings negatively. Upon release of this news, the market rallied 3%.
Company's debt position is healthy, with total assets of $53.68 bn (2020) and total liabilities of $14.68 bn (2020).
Technical Analysis
Lower lows on the weekly with engulfing bearish candles. Sellers have obviously been in control since 13 April 2021 and the stock is currently down 12% from its all-time high of $97. Possible entries into Micron Tech will be at: $84-85, $83 and $80. If $80 breaks, MU will hit $73-75 (corresponds approximately to the average PE TTM of 26.4). This is extremely unlikely given the strong tailwinds (chip shortage).
Take partial profits at $97, implied upside of about 15% from last traded price ($85.03). Consensus price target is $108, so a secondary profit taking region can be between $100-110.
Positive Catalysts
Earnings report demonstrating stronger-than-expected financial performance. Continued chip shortage given the rate at which digitalisation is taking place in developing regions and given the burgeoning middle-class in China & India. More contracts and renewal of contracts with big players such as Apple. Disruptors such as Work-from-Home (WFH), AI, AR, 5G, Data Centres and Cloud Computing and Internet of Things (IOT, eg smart-homes and improved tech-heavy Industry 4.0 processes) may bring sustained rise in demand for chips amidst continued technological disruption. Continued prudent management of CAPEX (capital expenditures) due to the semi-permanent nature of cleanrooms and fabs as well as the volatility of memory-chip prices in response to supply/demand forces (company should, with Samsung and Hynix, not over-supply the market - this can lead to razor-thin margins).
Investment Risks
Stiffer competition from other memory providers, resulting in reduced profit margins. As a result of stiffer competition, non-continuation of key contracts. Over-supply of the market with memory chips, akin to the situation in 2019.
Conclusion
A safe and rewarding long-term investment due to continued technological demand for memory chips, despite possible short-term risks in terms of memory chip ASP (average selling price) volatility.
Disclaimer: The writer holds 6 shares of Micron Tech and is looking to significantly scale up his position as the price falls.
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