For the time being, this market is willing to pay top dollar for companies that are perceived as high-growth plays on secular tech trends. However, it raises the bar for tech companies that are considered as cyclical bets. And perhaps this is resulting in some purchasing opportunities inside the latter group of organizations. Micron Technology (MU) is a prime example, with shares down more than 5% after the company released its May-quarter report on Wednesday afternoon. The memory giant surpassed expectations, as expected, after forecasting in late May that sales would be at or above the high end of its previous guidance range, and published sales and EPS guidance for the August quarter that was well above consensus. However, several of Micron’s comments concerning capital plans and potential cost headwinds did not appear to be warmly received. Micron expects expenditure to be in the mid-thirties of sales in the coming years (up from the low-thirties previously predicted), as it purchases EUV lithography tools from ASML Holding (ASML) for use in DRAM production methods to be deployed in 2024 and beyond. It also warned that the start of production for its 1-alpha DRAM and 176-layer 3D NAND manufacturing methods, as well as product mix changes and COVID mitigation expenditures, will result in manufacturing cost headwinds in the coming quarters. Over the next few years, neither of these factors should have a significant impact on Micron’s earnings. Capex is only increasing marginally as a percentage of sales, and it may fall after the EUV transition is complete. And the cost pressures appear to be primarily short-term. Micron, on the other hand, highlighted a number of positives in its report, earnings call, and earnings slides. Among them are the following: Micron boosted its full-year DRAM and NAND flash demand growth forecasts modestly, while predicting favorable supply/demand balances for DRAM and NAND flash beyond 2022. Micron reported that its DRAM average selling price (ASP) increased by about 20% sequentially in the May quarter, and its NAND ASP increased by a high-single-digit percentage, as memory spot and contract prices continue to rise. The business was upbeat about end-market demand patterns, citing strength in server DRAM (helped by strong cloud capex), automotive goods, graphics memory, and PC DRAM and SSDs. Despite its comments about manufacturing costs and prediction for DRAM bit shipments to be essentially flat sequentially due to the 1-alpha transition, Micron forecasted revenue and EPS for the August quarter to be comfortably above May quarter levels, owing to ongoing ASP increase. Micron’s forecast for DRAM and NAND supply and demand in 2021. Micron is the source of this information. All things considered, the present memory up-cycle isn’t expected to stop until at least mid-2022, with a significant amount of additional ASP rise occurring between now and then. Particularly because there is currently a lot of unmet demand in numerous large memory end-markets (notebooks, gaming gear, vehicles, etc.) due to non-memory chip and component shortages. With Micron’s profitability on the increase and the business pledging to return at least half of its free cash flow through stock buybacks, buybacks are expected to skyrocket in the future quarters, compared to a $150 million total in the May quarter. However, most commodity and cyclical investments, whether inside or outside of tech, have been punished by equity markets since mid-May, as money continues to pour into businesses viewed as secular growth plays, regardless of their multiples. As a result of its capex and manufacturing cost comments, Micron’s stock fell post-earnings, and it now trades for less than 7 times a fiscal 2022 (ends in August 2022) EPS consensus of $11.56, which appears to be a little conservative given Micron’s buyback plans and how memory demand and ASPs look set to trend into early 2022. It’s true that valuing a firm with large cyclical earnings swings isn’t as simple as slapping a P/E on peak-cycle EPS. Micron’s stock doesn’t appear to be as inexpensive if its stock is valued based on the $2.31 in EPS it generated between August 2019 and May 2020 during the last memory down-cycle. Taking the company’s cyclical-bottom and cyclical-peak four-quarter EPS figures, calculating their midway, and assigning a P/E to that number is one back-of-the-envelope technique to valuing such a company that I believe makes sense. If Micron’s yearly EPS peaks at $12.50 during the present cycle, we’d get a midpoint EPS number of $7.41. The midpoint would be $8.16 if it peaks at $14.00. Assigning a P/E of 15 to those figures would result in valuations of $111 and $122, respectively, which are well above Friday’s closing price of $80.33. In that context, Micron’s stock still appears to be undervalued, especially given how Micron’s earnings are likely to benefit long-term from buybacks, constant memory consumption growth, and (due to industry consolidation) controlled DRAM supply growth (after adjusting for cyclicality). Over the next six to twelve months, this isn’t a stock that’s going to create genuinely dramatic returns from current levels. However, I believe it has the potential to produce good ones. And, against the backdrop of rising inflation risks, its risk/reward profile over that timeframe appears to be far superior to that of many of the secular growth plays with nosebleed multiples./n
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