Micron Technology’s (MU) stock has surged to record highs as the firm benefits from a recovering semiconductor memory market and the boom in artificial intelligence.
However, optimistic investors piling into the stock now risk overlooking the cyclical nature of its businesses.
Since the beginning of 2024, the stock has gone up 65.6%, rising 14.9% in the last month alone. Over the last 12 months, Micron is up 108%, and over the last five years, it has gained 333%.
Micron Technology Stock Price
Source: Morningstar Direct, 17 June 2024
Micron and the AI Boom
Micron is the fifth-largest chipmaker in the world, specialising in computer memory and storage. In 2023, 71% of its revenue came from dynamic random access memory, or DRAM, chips, and 27% from NAND memory chips. DRAM and NAND chips are critical for data centers, consumer devices, cars, and industrial equipment.
Morningstar equity analyst William Kerwin sees pricing on both types of chips as vulnerable to significant ups and downs.
"Micron's sales are highly cyclical, with NAND and DRAM memory chip pricing being governed by global supply and demand,” he explains.
For example, during the company's fiscal year 2023, "sales got cut in half in a precipitous downturn," he says. And with a fixed cost base, Micron's profitability can take a major hit. However, Kerwin expects recovering sales and strong growth over the next three years.
One of the primary catalysts for Micron's recent gains has been the AI boom, which relies on more powerful computer chips in the data centers that train and operate AI systems.
"Micron is one of a handful of vendors for high-bandwidth memory, or HBM, which sells into AI applications," Kerwin says.
"HBM is a small minority of sales today, but we expect significant growth going forward. We believe Micron can earn a roughly 30% non-GAAP operating margin at midcycle conditions, with higher and lower levels based on current supply and demand.
"[Ultimately,] we forecast significant profit growth over the next five years."
But even with an optimistic forecast for sales, the company's cyclical business means investors should not expect straight-line growth.
"As promising as growth vectors like AI are, we continue to expect cyclical downturns and upswings in the memory chip business over the long term as demand and supply inevitably fluctuate," Kerwin says.
Key Morningstar Metrics For Micron Technology
• Fair Value Estimate: $80.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: None
• Fair Value Uncertainty: High
• Forward Dividend Yield: 0.32%
Micron Stock Valuation
Even as Micron stands to benefit from a cyclical recovery in its chip business and revenues from AI, Kerwin cautions investors: "while [AI] will have an impact on the firm’s fundamentals, we think surging hype has led to more share price appreciation than is warranted in Micron's actual HBM opportunity."
Micron now trades at about $147 (£115.73) per share, and despite the positive outlook, Kerwin says it’s overvalued. He assesses the stock’s fair value at $80 per share.
"To buy Micron at current levels, we believe investors would have to expect robust, double-digit growth for at least the next five years, and moderated long-term cyclicality," he says.
"We don’t see either as reasonable."
Micron Technology Stock vs Morningstar Fair Value Estimate
Source: Morningstar Direct, 17 June 2024
The following are highlights of Kerwin's current outlook for Micron and its stock. The full report and more of his coverage of Micron are available here.
Fair Value Estimate for Micron Stock
With a 1-Star rating, Micron stock is significantly overvalued compared to its Fair Value Estimate of $80 per share. Morningstar's valuation implies a fiscal 2024 enterprise value/sales of four times. Against fiscal 2025 estimates, our valuation implies an adjusted price/earnings of 11 times and an enterprise value/sales of three times. The greatest drivers to our valuation are cyclical sales and cyclical profitability over a fixed cost base.
We forecast Micron's results to be highly cyclical and note that fiscal 2023 represents one of the most severe downturns the chipmaker has seen, with gluts of chip supply for data centers, smartphones, and PCs following post-pandemic demand. Micron was also hampered in fiscal 2023 by the loss of revenue from memory sales into Chinese data center customers, thanks to retaliatory moves against other US government restrictions.
Read more about Morningstar's fair value estimate for Micron.
Economic Moat Rating
We do not believe Micron possesses an Economic Moat. The firm operates in the highly capital-intensive industries of DRAM and NAND flash semiconductors, and it doesn't earn good enough profit margins to give us confidence in enduring economic profits. We view DRAM and NAND as commodity-like products, prone to supply-and-demand dynamics and steady pricing erosion. While we see better margins in DRAM, which has consolidated to three primary players (versus six in NAND), we still don't see good enough returns on invested capital over a cycle to merit a moat. We expect years of positive economic profits during periods of tight supply and strong demand to help support good pricing, but we also see steep downcycles giving rise to poor profitability and eroding the profits built during an upswing.
Read more about Micron’s economic moat.
Financial Strength
We expect Micron to focus on generating organic cash flow and keeping its manufacturing footprint rightsized over the medium term. As of August 31, 2023, Micron held $9.6 billion in cash and equivalents, compared with $13.3 billion in total debt. We don't foresee refinancing, as Micron's debt is long-dated, with less than a quarter due over the next five years. If Micron ran into a liquidity crunch, it would have an untapped $2.5 billion revolver.
Read more about Micron's financial strength.
Risk and Uncertainty
We assign Micron a High Uncertainty Rating. In our view, its largest risk comes from its high cyclicality. As a producer of memory chips, it's susceptible to fluctuations in market supply and demand, and periods of oversupply can slash prices. Micron is vertically integrated with a high fixed cost base, so weak pricing can have an outsize effect on its profitability, as seen in fiscal 2023.
Micron also bears risk from its China exposure – roughly 25% of sales. The Chinese government restricted Micron's sales into data centers in 2023, cutting off roughly 10% of the firm's revenue. The other 15% sells into consumer electronics and autos, which we think poses less national security risk. Still, escalating trade tensions could see a complete barring of US-produced memory chips, or alleviated restrictions could see Micron regain its lost revenue.
We see some risk from the relatively unconsolidated NAND market. We expect consolidation over the long term, and if Micron is left out, it could see a gap in scale relative to peers, which could hurt its ability to reduce costs and maintain profitability.
Read more about Micron’s financial risk and uncertainty.
Micron Bulls Say
When memory markets are on an upswing and demand is strong, Micron's sales growth and profitability can be impressive.
Micron is a major producer of DRAM and NAND chips, with healthy market share positions, letting it benefit from secular trends in AI, 5G, and connected cars.
We like Micron's shareholder returns, and view its balance sheet as strong for a cyclical firm.
Micron Bears Say
Micron has a high fixed cost base, leaving it vulnerable to underutilisation charges and major profit compression when memory markets enter a downturn.
We see DRAM and NAND as commodity-like products, and we foresee little ability for Micron to build durable differentiation against its competitors.
Micron has meaningful China exposure and bears the risk of further restrictions in that market hampering sales.
