This article is authored by MOI Global instructor Naveen Jeereddi, Chief Executive Officer at Jeereddi Partners, based in Los Angeles.
Micron Technology Inc is a global manufacturer of dynamic random access memory chips (DRAMs), flash memories (NANDs), semiconductor components, and other memory modules for the computer industry. Micron trades at less than 4x LTM earnings and EBIT. The memory industry is a profitable oligopoly (consisting of three DRAM players and six NAND players) characterized by short pricing cycles of memory products and strong secular demand trends including cloud computing, mobile devices, artificial intelligence, gaming platforms, autonomous vehicles, and the internet-of-things applications.
Micron has an approximately $40 billion market capitalization with no debt and has been a public company for many decades. Micron investors, having experienced tremendous cyclical feast-or-famine swings in the past, possess a reflexive distaste for Micron in down cycles, resulting in a bargain valuation for the business on multiple metrics. We believe that most Micron investors are short-term oriented and as a result, are mispricing the recent improvement in Micron’s underlying industry fundamentals and the company’s newly implemented capital allocation and share repurchase programs.
Micron’s industry supply and demand structure have vastly improved over the last few years. The industry has consolidated on the supply side with more rational profit-oriented players. Demand has exploded and diversified with new sustainable long-term secular drivers. Barriers to entry are higher (and increasing) due to the complexity and capital intensity of the sector. Also, approximately 20% of Micron’s revenue is a more stable, high cash-flow, sticky systems business. We estimate that the systems business valued alone (at reasonable multiples) could approach a significant portion of Micron’s enterprise value. As such, Micron shareholders have an inexpensive call option for the remaining “non-system” business.
Micron’s business has transformed from a PC-related commodity business to a more diversified technology platform in a short time. The market is not correctly evaluating that change. Micron’s valuation is extreme. Micron shares trade at a low-single-digit multiple to normalized earnings, EBIT, and free cash flow and a slight premium to tangible book. Investors are receiving a low price with enormous future secular growth attached to Micron. Replacement cost is likely far higher than the current enterprise value. Underlying demand growth for memory products is virtually certain over time while the supply curve appears rational.
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