Zhitong Finance APP observed that Micron Technology (MU.US) stock price has fallen by more than a quarter in the past six months as investors worry about a possible oversupply of memory chips. Although the company's fourth-quarter earnings report on September 28 exceeded analysts

Zhitong Finance APP observed that Micron Technology (MU.US) stock price has fallen by more than a quarter in the past six months as investors worry about a possible oversupply of memory chips. Although the company's fourth-quarter earnings report on September 28 exceeded analysts' expectations in terms of revenue and profit, its first-quarter performance guidance was weaker than expected, causing the stock to remain lower.

Micron Technology shares have risen more than 40% in the past 12 months, but the future trend of the stock is causing intense discussion in the market. Bulls claim the stock remains cheap and will still benefit from long-term growth in many industries with strong chip demand; bears argue the company's gross margins are under pressure and its growth has been cyclical.

1. Micron Technology’s cyclical recovery

Due to the global oversupply of DRAM and NAND memory chips, Micron Technology’s revenue recorded year-on-year declines for six consecutive quarters in fiscal 2019 and fiscal 2020, and did not resume growth until the third quarter of fiscal 2020. . The company's revenue growth has accelerated since fiscal 2021, and its non-GAAP gross profit margin and operating profit margin have also recorded growth.

Micron Technology’s recovery has been driven by three factors.

First, as the oversupply of DRAM and NAND memory chips has ended, their prices have stabilized, and the stay-at-home trend during the epidemic has boosted sales of memory chips used in data centers, new PCs and game consoles.

Secondly, during the epidemic, the production of next-generation game consoles, new smartphones, connected cars, industrial machines and 5G network infrastructure equipment has accelerated, resulting in tight supply and high prices of memory chips.

Finally, Micron Technology is technologically ahead of its competitors with its 1-alpha DRAM and 176-layer NAND node. These nodes are currently the most advanced mass production nodes in their respective markets, widening Micron's moat to compete with Samsung, SK Hynix, Western Digital (WDC) and Kioxia in the fierce memory chip market.

2. Has this recovery cycle peaked again?

Micron Technology’s growth in fiscal 2021 looks impressive, but market research firm Gartner predicts that DRAM and NAND prices will fall significantly in the second half of 2022. Trendforce expects DRAM prices to start falling in the fourth quarter of 2021 and continue throughout 2022.

These pessimistic expectations have sounded the alarm for Micron Technology. 72% of the company's revenue in fiscal 2021 comes from DRAM chips and 25% comes from NAND chips.

The company's first-quarter guidance suggests a slowdown has already begun: It expects first-quarter revenue to grow 33% year-over-year, a slowdown from the fourth quarter of the previous fiscal year, and the guidance is also below analyst expectations 47%. In addition, the company also predicts that non-GAAP gross margin will continue to decline by 90 basis points to 47% (but still increase from the same period last year), and non-GAAP profit will increase by approximately 169%, which is lower than the 218% expected by analysts.

Because Micron Technology produces its own chips rather than outsourcing them to chip manufacturers, the company has not yet been seriously affected by the chip shortage. However, the company still expects shortages of other PC components such as CPUs and GPUs to curb short-term demand for DRAM and NAND chips. In addition, the company is also beginning to face supply chain constraints related to certain integrated circuit components amid a global chip shortage that will further inhibit its shipments in the short term.

3, Expectations and Valuations

Micron Technology did not provide any firm performance guidance for fiscal 2022, but CEO Sanjay Mehrotra predicted that the company will still create revenue this year due to strong demand in data centers, servers, automotive and 5G markets. "Record revenue and solid profitability."

analysts predict that Micron Technology’s revenue and adjusted profits will increase by 16% and 48% respectively in fiscal year 2022, and its revenue and profits are expected to increase by 16% and 25% respectively in the next fiscal year.

Based on this growth rate, Micron Technology stock still looks very cheap, with a price-to-earnings ratio of 7.5 times and a price-to-sales ratio of 2.4 times. But shares of Western Digital, which competes with Micron Technology in the NAND market, look even cheaper, trading at just 5 times earnings and less than 1 times sales.

Investors are concerned that there could be a severe oversupply of memory chips in the second half of 2022, which could occur just as Micron Technology resolves its near-term supply chain challenges. If this happens, Wall Street's valuation of Micron Technology may be too optimistic. So investors don't seem willing to pay a higher premium for these two stocks.

4, Micron Technology is still worth buying

Micron Technology’s growth will slow down this year due to a higher base in the same period last year, but the long-term expansion of the 5G, automotive and industrial IoT markets will prevent memory chip prices from plummeting. The stock is still very cheap right now, and investors who buy into the stock could still reap some substantial gains by the end of 2022.