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Why Micron (MU) Might Not Be Tech's Perfect Value Stock
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Shares of Micron Technology (MU - Free Report) have soared more than 350% over the past two years, thanks in large part to rapid expansion of the memory-chip maker’s top and bottom lines. This has helped the stock emerge as a favorite among explosive-growth investors looking for tech firms that are outpacing the broader market.
But more recently, value investors have flocked to MU and its attractive valuation metrics. Wall Street seemingly cannot keep up with Micron’s lightning-quick growth, leaving the company’s Forward P/E and Earnings Yield figures well within the scope of a value investor. The stock frequently sports an “A” grade for Value in our Style Scores system, and to many, it is now one of the top value opportunities in the entire technology sector.
Micron is currently trading with a Forward P/E of 5.1, which compares incredibly favorably to the average of 17.4 held by the S&P 500, as well as the 21.8 average we see in our “Computers and Technology” sector. Breaking it down even further, MU also appears undervalued compared to the Semiconductors industry, which currently holds an average P/E of 13.7.
So how could it be possible for Micron to be trading at such a miniscule earnings multiple? At least part of the answer lies in the fact that Micron’s core business, computer and mobile memory, has been commoditized by investors in recent years. For whatever underlying reason, the market’s memory giants are simply not treated like other tech stocks.
When looking at Micron’s key valuation metrics, it probably helps to compare the stock to others in the memory business, including Western Digital (WDC - Free Report) , Seagate (STX - Free Report) , and Toshiba (TOSYY - Free Report) . Each of these companies has expertise in different areas and are not always directly competing, but they all reflect the commoditization of the memory business.
Just take a look at how MU’s P/E compares to its peer group:
MU is still trading at a discount to the rest of its peers, but we can see that the gap is significantly smaller.
Now, it should be clearly stated that the observation of this trend is not a knock on Micron or its business model. Our current consensus estimates are calling for EPS growth of 107.9% and sales growth of 40.7% this fiscal year, and that type of year-over-year improvement speaks for itself.
But investors should know that this stock is likely to behave differently than other tech companies with triple-digit earnings growth, just as it does not see the price action one would expect from a stock trading a just 5x earnings.
Another thing investors might want to consider here is Micron’s P/S ratio. While the P/E ratio has long been a tried-and-true method for valuing stocks, some investors prefer the P/S ratio because revenues are often considered the more-accurate gauge for evaluating the health of a business.
Here’s a look at Micron’s P/S versus its peer group:
Now we are starting to see that Micron is not the flawless value stock that it might appear to be. Investors should certainly consider the whole picture for this Zacks Rank #3 (Hold) stock right now.
Want more market analysis from this author? Make sure to follow @Ryan_McQueeneyon Twitter!
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
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Why Micron (MU) Might Not Be Tech's Perfect Value Stock
Shares of Micron Technology (MU - Free Report) have soared more than 350% over the past two years, thanks in large part to rapid expansion of the memory-chip maker’s top and bottom lines. This has helped the stock emerge as a favorite among explosive-growth investors looking for tech firms that are outpacing the broader market.
But more recently, value investors have flocked to MU and its attractive valuation metrics. Wall Street seemingly cannot keep up with Micron’s lightning-quick growth, leaving the company’s Forward P/E and Earnings Yield figures well within the scope of a value investor. The stock frequently sports an “A” grade for Value in our Style Scores system, and to many, it is now one of the top value opportunities in the entire technology sector.
Micron is currently trading with a Forward P/E of 5.1, which compares incredibly favorably to the average of 17.4 held by the S&P 500, as well as the 21.8 average we see in our “Computers and Technology” sector. Breaking it down even further, MU also appears undervalued compared to the Semiconductors industry, which currently holds an average P/E of 13.7.
So how could it be possible for Micron to be trading at such a miniscule earnings multiple? At least part of the answer lies in the fact that Micron’s core business, computer and mobile memory, has been commoditized by investors in recent years. For whatever underlying reason, the market’s memory giants are simply not treated like other tech stocks.
When looking at Micron’s key valuation metrics, it probably helps to compare the stock to others in the memory business, including Western Digital (WDC - Free Report) , Seagate (STX - Free Report) , and Toshiba (TOSYY - Free Report) . Each of these companies has expertise in different areas and are not always directly competing, but they all reflect the commoditization of the memory business.
Just take a look at how MU’s P/E compares to its peer group:
MU is still trading at a discount to the rest of its peers, but we can see that the gap is significantly smaller.
Now, it should be clearly stated that the observation of this trend is not a knock on Micron or its business model. Our current consensus estimates are calling for EPS growth of 107.9% and sales growth of 40.7% this fiscal year, and that type of year-over-year improvement speaks for itself.
But investors should know that this stock is likely to behave differently than other tech companies with triple-digit earnings growth, just as it does not see the price action one would expect from a stock trading a just 5x earnings.
Another thing investors might want to consider here is Micron’s P/S ratio. While the P/E ratio has long been a tried-and-true method for valuing stocks, some investors prefer the P/S ratio because revenues are often considered the more-accurate gauge for evaluating the health of a business.
Here’s a look at Micron’s P/S versus its peer group:
Now we are starting to see that Micron is not the flawless value stock that it might appear to be. Investors should certainly consider the whole picture for this Zacks Rank #3 (Hold) stock right now.
Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
Click for details >>