Value investors flock to the commoditized market of semiconductor memory to find “cheap” stocks that are still likely to grow on the back of evolving and advancing technology. Many of Wall Street’s favorite high-tech growth companies are trading with stretched valuations, but memory firms like Micron (MU - Free Report) and Western Digital (WDC - Free Report) seem to present investors with incredible value opportunities.
Micron and Western Digital are not perfectly comparable companies, but ever since WDC’s acquisition of SanDisk in 2016, these two memory solutions giants have been squaring off in the growing NAND and SSD markets.
NAND and SSD promise to be the fastest-growing segments of the memory industry over the next few years, and investors looking for exposure to this growth should consider both MU and WDC. But a diversified value portfolio probably does not have room for two stocks to capture the same trend, so which of these companies is the better buy right now? Let’s take a closer look.
Traditional value investors love to look at the price-to-earnings ratio to determine great buying opportunities. After all, buying a stock makes one a partial owner of that company, so investors are inherently interested in profitability.
With that said, here is a look at the Forward P/E trend for MU and WDC over the past year:
There are at least a couple of things to note here. First of all, both of these stocks are trading at a discount compared to the broader market, as well as the technology sector. As mentioned, memory is commoditized—thanks in part to cyclical sales patterns—and investors tend to keep valuations in check because of this.
Still, if your primary value strategy is to find stocks that are undervalued versus their broader sector, both of these companies look like solid options right now.
Nevertheless, it is worth noting that WDC has been trading at a noticeable premium to MU for the entirety of the past year. Western Digital is a bit further along in its growth cycle, so investors might be showing a willingness to pay more for what could be perceived as a less-risky option.
But Micron’s low valuation still looks attractive here. Investors are getting a great price for a company with plenty of expansion opportunities, including a sizeable share of the budding NAND and SSD markets.
Value investors should also be interested in a stock’s recent price performance. For instance, if a stock has sold off significantly, its lower valuation might speak to a greater problem that has forced investors to flee.
Check out how MU and WDC have performed since this time last year:
As we can see, Micron is carrying significantly stronger momentum right now. These stocks were keeping pace with each other until August, and then MU began to take off. This incredible performance also underscores the attractiveness of Micron’s current valuation.
We have proven that both of these stocks are intriguing picks, but the best value opportunities are undervalued companies that are also sporting strong Zacks Ranks. In this case, Micron and its Zacks Rank #2 (Buy) have another edge over Western Digital, which is currently sporting a Zacks Rank #3 (Hold).
The proven Zacks Rank system puts an emphasis on earnings estimates and estimate revisions. Within the past 60 days, we have seen eight revisions to MU’s full-year earnings estimates, with 100% agreement to the upside. The Zacks Consensus Estimate for the company’s EPS has gained a staggering 74 cents over this timeframe.
This improving analyst sentiment, on top of Micron’s attractive valuation and insane momentum, make MU look very interesting right now.
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