Shares of Micron (MU - Free Report) have tumbled more than 15% from the 52-week highs they reached in late May as investors have cooled on the chip industry amid stretches of market-wide volatility. Micron is still one of Wall Street’s top success stories from the past few years, but concerns that its bullish cycle is ending have many investors ditching the memory giant for now.
There are loud and influential forces within the investing world which tend to warn against the familiar cyclical trends of the semiconductor space. Periods of particular customer habits, especially in the consumer space, tend to inspire growth for chipmakers, but stocks can suffer strong pullbacks when these trends burn out.
Those who have turned bearish on Micron are clearly worried about getting caught in the one of these pullbacks. Plus, international tariff disputes—including the so-called trade war between the U.S. and China—threaten to hurt bottom lines and create headwinds for many major chip companies.
But Micron should actually be uniquely protected from both of these potential problems.
Overblown China Fears
Micron is, of course, heavily exposed to China, with about 50% of the company’s most recent full-year revenue coming from the key Asian market.
However, China’s response to the trade war has thus far focused primarily on agricultural products, manufacturing supplies, and furniture.
Micron does have its own manufacturing facilities in China, and that could be a detriment if it does any importing from those locations as U.S. tariff plans have mentioned semiconductors and equipment. But of Micron’s $19.4 billion in net property, plant, and equipment, just $453 million of that is from China.
What’s more, semiconductor supply chains are notoriously diverse, and tariffs can be avoided by making simple adjustments to the chain.
There is always the possibility that Micron could find itself becoming a specific target of the trade war—a fear that was seemingly confirmed when the firm was temporarily banned from selling 26 different semiconductor products in China last month.
But again, we saw that fears here were likely overblown, with Micron confirming that the affected products would represent just “slightly more than” 1% of its annual sales, while the injunction will hurt Q4 revenue by about 1%.
Secular Trends Driving Growth
Micron is also protected from a cyclical burnout due to its exposure to fresh, secular growth drivers. In a conference call earlier this year, Micron CEO Sanjay Mehrotra attempted to describe how much different today’s market is compared to others in the past.
“The dealer market today is very different from the PC-dominated market of the past,” he said. “More specifically, memory is making possible applications such as AI and VR, and enabling new cloud-based business models which deliver a fundamental value far in excess of a price per bit.”
Any responsible tech-focused investor already knows about many of the applications Mehrotra is referring to, but many forget to consider how important things like VR, AI, and IoT could yet be for Micron.
These trends and their associated products—including smart appliances, wearables, and in-home virtual assistants—all create a ton of new data. That data has to go somewhere; it needs to be stored somewhere. This is where Micron’s memory solutions become useful.
If you believe we have just reached the tip of the iceberg in terms of what can be done with these revolutionary technologies, then you should also believe that Micron has plenty more room to grow alongside them.
All of the above factors are evident in what is an exceptionally bullish analyst picture for Micron right now. The company has seen eight positive revisions to its full-year EPS estimates within the past 60 days, with no negative revisions coming in that time.
Micron’s current fiscal year ends in August. Looking ahead, we have seen seven positive revisions—and just one negative revision—to its next-year EPS estimates in the same 60-day timeframe. Positive earnings estimate revisions are correlated with positive share price movement, and that is why MU currently sports a Zacks Rank #1 (Strong Buy).
Investors will also notice that Micron is trading at an extremely attractive valuation. The stock is currently trading at just 4.7x forward 12-month earnings. Over the past year, its earnings multiple has been as high as 6.8x and as low as 4.1x. Its 52-week median earnings multiple is 5.3x.
Micron’s potential to benefit from amazing secular trends makes its below-average current earnings multiple even more appetizing.
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