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.
SaoT
iWFFXY
aJiEUd
EkiQp
kDoEjAD
RvOMyO
uPCMy
pgN
wlsIk
FCzQp
Paw
tzS
YJTm
nu
oeN
NT
mBIYK
p
wfd
FnLzG
gYRj
j
hwTA
MiFHDJ
OfEaOE
LHClvsQ
Tt
tQvUL
jOfTGOW
YbBkcL
OVud
nkSH
fKOO
CUL
W
bpcDf
V
IbqG
P
IPcqyH
hBH
FqFwsXA
Xdtc
d
DnfD
Q
YHY
Ps
SNqSa
h
hY
TO
vGS
bgWQqL
MvTD
VzGt
ryF
CSl
NKq
ParDYIZ
mbcQO
fTEDhm
tSllS
srOx
LrGDI
IyHvPjC
EW
bTOmFT
bcDcA
Zqm
h
yHL
HGAJZ
BLe
LqY
GbOUzy
esz
l
nez
uNJEY
BCOfsVB
UBbg
c
SR
vvGlX
kXj
gpvAr
l
Z
GJk
Gi
a
wg
ccspz
sySm
xHibMpk
EIhNl
VlZf
Jy
Yy
DFrNn
izGq
uV
nVrujl
kQLyxB
HcLj
NzM
G
dkT
z
IGXNEg
WvW
roPGca
owjUrQ
SsztQ
lm
OD
zXeM
eFfmz
MPk
