Micron Stock Analysis | Undervalued Now? Intrinsic Valuation! - YouTube

Hello everyone, this is Victor here.

Welcome to the Intelligent Investor Channel.

At the time of making this video, most US tech stocks are in a large correction.

Most US tech stocks, in my opinion, are undervalued now.

Several subscribers asked me to analyze Micron stock to see if it’s undervalued now.

So in this video, I’m going to analyze Micron stock’s fundamentals to see if it is a great

growth stock for long-term investing.

I will also show you how to calculate Micron stock’s intrinsic value.

You will learn about these topics in this video:

Micron’s Business Overview and Financials, Micron’s Economic Moat,

Micron’s Long-term Growth Prospects, Micron’s biggest risk,

Micron stock valuation, And will I buy Micron Stock?

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Let’s start.

When it comes to investing in stocks, we have to understand the business first, so let’s

talk about Micron’s business fundamentals first.

Micron is a leading manufacturer of Dynamic Random-Access Memory and NAND flash memories.

Micron’s DRAM products can be found in many personal computers, gaming computers, enterprise

computers, cloud servers, data centers, smartphones, mobile devices, Nvidia and AMD GPUs, networking

devices and autonomous driving vehicles.

For example, Micron makes DDR4 and DDR5 SDRAMs.

Micron makes GDDR6 and GDDR6X rams that are used in many top-end Nvidia and AMD GPUs.

In addition to Micron’s DRAM products, Micron makes NAND-based storage products such as

Solid-State Drives SSDs for consumers and data centers.

Micron also makes NAND flash memory products such as memory cards, USB drives, and flash

memory that are in our smartphones and tablets.

In addition to Micron’s brand, Micron owns Crucial which makes SSDs and DRAMs for computers.

Let me show you Micron’s revenue breakdown here.

This is from the most recent Q2 quarterly report.

Micron’s DRAM products contributed 73% of total revenue and its NAND products contributed

25% of total revenue.

Micron reports its revenues and operating income in these four business segments: Compute

and Networking Business Unit, Mobile Business Unit, Storage Business Unit, and Embedded

Business Unit.

Let’s go over these four business segments here, so you will know which businesses have

the highest growth rates and growth potential going forward.

Micron’s Compute and Networking Business Unit earns the most revenue and operating

income.

This business includes memory products sold into client, cloud server, enterprise, graphics,

and networking markets.

There is a large demand for DRAMs, especially from enterprise customers, cloud providers,

gamers, and GPU makers such as Nvidia and AMD.

You can see this unit had a high revenue growth rate in the recent Q2 quarter.

The Mobile Business Unit includes memory and storage products sold into smartphone and

other mobile devices.

This business’ revenue growth is largely dependent on the smartphone market’s growth

every year.

Right now, the smartphone market is very mature, and its growth rate has slowed down a lot

in recent years.

This is why you can see this business segment had a very low growth rate in the recent Q2

quarter.

The Storage Business Unit includes SSDs and storage-related solutions sold into enterprise

and cloud, client and consumer storage markets.

There is a large demand for SSD storage products, especially from enterprise clients and cloud

providers.

This is why you can see this business unit had a very high revenue growth rate compared

to other business segments in the recent Q2 quarter.

And finally, the Embedded Business Unit includes memory and storage products sold into automotive,

industrial and consumer markets.

This is another important business segment because there is a large demand for memory

and storage products.

You can see this unit had a high revenue growth rate in the recent Q2 quarter.

In terms of financials, Micron has become a very profitable business.

For example, in the recent Q2 quarter, Micron had a high gross margin of 47% and an operating

margin of 33%.

Micron also has a very healthy balance sheet.

In the recent Q2 quarter, the company had $11.95 billion of cash equivalents and investments.

It had $7 billion of current and long-term debt.

This means the net cash is $4.87 billion.

Here is the important part you will want to know.

Micron’s business is very cyclical because Micron’s sales growth is largely dependent

on the demand and supply of DRAM and NAND products.

If you look at Micron’s financials here, you can see Micron’s Revenue growth, operating

income growth, operating cash flow growth, and free cash flow growth had been very cyclical

in the past 10 years.

Recently, Micron started paying dividends.

At the time of making this video, Micron’s forward dividend yield is 0.58%.

Management said that they intend to return more than 50% of the cross-cycle free cash

flow through dividends and share buybacks going forward.

And if they believe the company is undervalued at larger discounts to the intrinsic value,

they would be more aggressive in their share buybacks.

When it comes to investing, we have to be forward-looking, so let’s talk about Micron’s

economic moat and long-term prospects.

Personally, I believe Micron has a very narrow economic moat for these reasons.

At the time of making this video, there are three major players that dominate the entire

DRAM market.

These three major players are Samsung, SK Hynix and Micron.

According to TrendForce, in Q4 2021, Samsung had the largest market share, SK Hynix had

the second largest market share, and Micron had the third largest market share.

Based on what I know, these three companies have been dominating the DRAM market for a

while.

Samsung and SK Hynix are South Korean companies.

According to this article, Micron is the last US manufacturer of DRAM and NAND flash memory

products.

In the NAND flash memory market, this market is not as concentrated as the DRAM market.

The NAND flash memory market has many major players.

According to TrendForce, in Q4 2021, Samsung had the largest NAND market share, followed

by Kioxia, Western Digital, SK Hynix and Micron.

Here is the important part you will want to know.

Barriers to entry to the chip-making business are extremely high because it is very capital

intensive for new companies to make their own fabrication plants, develop their own

leading-node technologies to make their chips, and compete with the existing dominant players.

Semiconductor companies have been consolidating for many years in other to stay competitive.

They consolidate because they want to improve their chipmaking technologies, expand to more

markets, expand their wafer capacities, improve their own economies of scale, and of course

make more profits.

This is why many smaller chip companies are often acquired by the larger players.

For example, according to Micron’s website here, you can see Micron had acquired many

smaller companies in the past 10 years, ranging from Forward Next in 2019 to Elpida Memory

in 2013 and Toshiba’s DRAM business in 2002.

In my opinion, in the DRAM market, I believe it is very hard for other companies to compete

with Samsung, SK Hynix and Micron.

The DRAM industry is an oligopoly market dominated by three players.

This is why I believe Micron has a narrow economic moat even though DRAM and NAND memory

products tend to be almost the same with similar pricing and similar performances.

In terms of long-term prospects, I believe Micron does have great long-term prospects

over the next five to ten years.

Here is why.

According to Micron’s latest earnings call, Micron’s current 1-alpha DRAM and 176-layer

NAND technology node are leading in their markets, and these new technologies are providing

significant cost reductions to Micron’s manufacturing processes.

This is why Micron’s gross margins have improved significantly in recent quarters.

Management said this in the recent earnings call:

“Execution was outstanding with our industry-leading 1-alpha DRAM and 176-layer NAND technology

node ramps delivering strong cost reductions.

Our portfolio transformation continues to gain momentum as we lead the industry on the

DDR5 transition and grow our mix of NVMe data center SSDs.”

“Following a solid first half, we are on track to deliver record revenue and robust

profitability in fiscal 2022 and remain well-positioned to create significant shareholder value in

fiscal 2022 and beyond.”

“In fiscal Q2, 1z and 1-alpha DRAM combined represented the majority of our DRAM bit shipments,

while 176-layer NAND represented the majority of our NAND bit shipments.

Our 1-alpha DRAM and 176-layer NAND products are achieving excellent yields, providing

us with solid front-end cost reductions and contributing meaningful revenue.

We qualified additional products on these advanced nodes with a broad set of customers,

which sets us up for continued strong revenue ramp in the second half of the fiscal year.”

“We are tracking several quarters ahead of the industry in ramping products based

on these leading-edge process technologies.

We are also investing to maintain technology leadership for the next decade and making

good progress in the development of future technology nodes.”

At the time of making this video, there is a large demand for the most advanced DRAM

and NAND memory products for data centers, servers, autonomous driving electric vehicles,

5G smartphones, gaming computers, enterprise computers, GPUs made by Nvidia, AMD and Intel,

and any devices that need DRAM memories and NAND-based solid-state drives.

Management believes that Micron’s two fastest-growing markets are hyperscale data centers and electric

vehicles with autonomous driving features because these markets require much more DRAM

and NAND memory and storage products.

Management said this.

“Demand for memory and storage is broad, extending from the data center to the intelligent

edge and to a growing diversity of user devices.

Memory and storage revenue has outpaced the rest of the semiconductor industry over the

last 2 decades, and we expect this trend to continue over the next decade, thanks to ongoing

advancement of AI, 5G and EV adoption.”

“Last year, data center became the largest market for memory and storage, eclipsing the

mobile market.

Looking ahead, we expect data center demand growth to outpace the broader memory and storage

market over the next decade, fueled by secular drivers in cloud and healthy enterprise IT

investment.”

“The automotive and industrial segments are expected to be the fastest-growing memory

and storage markets over the next decade.

Today, more than 10% of our revenue comes from these end markets, and we are exceptionally

well-positioned as a market share leader.

In fiscal Q2, our auto revenue set a new record driven by robust demand for memory and storage.

Auto unit production remains below demand constrained by numerous supply chain challenges,

including logic and analog semiconductor component shortages.”

“Nevertheless, the demand for memory and storage remains strong driven by auto content

growth.

New EVs are becoming like data center on wheels, and we expect over 100 new EV models to launch

worldwide in this calendar year alone.

These new EVs include advanced ADAS and in vehicle infotainment features that have significantly

higher memory and storage requirements.

In fact, some of these Level 3 autonomous EVs have about $750 in memory and storage

content, which is 15x higher than the average car.”

In terms of revenue guidance, management said: “We expect calendar 2022 industry bit demand

growth to be in the mid to high teens for DRAM and at approximately 30% for NAND.

We anticipate underlying demand in calendar 2022 to be led by data center, ongoing adoption

of 5G smartphones and continued strength in automotive and industrial markets.”

In October last year, Micron’s management stated that they are planning to invest more

than $150 billion over 10 years in leading-edge memory manufacturing and research and development.

This suggests that there will be a large demand for Micron’s memory and storage products

over the next 10 years.

Otherwise, Micron would not plan to invest $150 billion over the next 10 years in the

leading-edge memory manufacturing processes.

Management also said that in the 2025 to 2026 timeframe, they will need to add “new wafer

capacity for DRAM in order to continue to meet the increase in demand for the later

half of this decade through the 2030 time frame.”

Now, Micron does have many risks.

Micron’s first biggest risk is obviously competition.

I mentioned this earlier.

In the DRAM market, Micron faces a lot of competition from Samsung and SK Hynix.

In the NAND flash memory market, Micron has many large competitors including Samsung,

Kioxia, Western Digital and SK Hynix.

In my opinion, most DRAMs and NAND-based storage products are commodities with very similar

performances and very few differences.

This means Micron’s competitors can offer lower prices in other to take more market

shares.

For Micron to stay competitive, Micron has to invest billions in the most lead-edge manufacturing

processes to make products such as GDDR6X for Nvidia’s top-end GPUs, DDR5 for the

next-gen computers and data centers, and 176-layer NAND-based solid-state drives for data centers.

The second major risk is that Micron’s business is very cyclical.

Micron’s revenue is largely dependent on DRAM and NAND prices every quarter.

DRAM and NAND prices are largely dependent on the supply-demand balance of DRAM and NAND

products.

For example, in 2019 and 2020, DRAM and NAND prices dropped a lot.

During this period, you can see Micron’s revenue and operating income also dropped

a lot.

The major risk is this.

If there is an oversupply of DRAM and NAND products, their prices will drop significantly,

which will lead to much lower revenues for Micron similar to 2019 and 2020.

The third biggest risk is inflation risk.

Every semiconductor company is facing the same inflation risk.

If there are more COVID-19 restrictions in China that will disrupt Micron’s production

there or if the Ukraine war continues longer or if commodity and raw material prices continue

to increase, these higher costs may eventually impact Micron’s gross margin.

[Micron stock valuation] Let's calculate Micron stock’s intrinsic

value, so we will know whether Micron stock is undervalued, fairly valued or overvalued.

I always use this intrinsic value calculator here to calculate a stock’s intrinsic value.

If you want this calculator, you can download it in my Patreon Blog in the video description.

Here are the key assumptions.

First, I define Micron’s intrinsic value as its future cash flows discounted to the

present day.

The discount rate is 10%.

This is higher than the 8.5% cost of equity from Finbox.com.

I used a higher discount rate here to be more conservative.

Micron’s most recent 12 months of free cash flow is $4.86 billion.

Based on the long-term growth prospects I talked about earlier, I believe Micron’s

free cash flow will grow at a compound annual growth rate CAGR between 10% and 20% over

the next 5 years.

I believe this is a reasonable estimate.

In comparison, Micron’s EBITDA grew at a CAGR of 29.77% in the past 5 years.

To calculate the terminal value at the end of year 5, we are using both the perpetual

growth and exit multiple models here.

Then, we take the average of both models to calculate the terminal value.

Let’s go over these three case scenarios here: worst-case, normal-case and best-case

scenarios.

Under the worst-case scenario, we are using a compound annual growth rate CAGR of 10%

over the next 5 years.

If we forecast Micron’s free cash flow for the next 5 years and discount the free cash

flow to the present day, Micron’s intrinsic value should be around $66 billion for the

entire company or $58/share.

I’m giving this scenario a 25% probability here.

Under the normal-case scenario, we are using a compound annual growth rate CAGR of 15%

over the next 5 years.

If we forecast Micron’s free cash flow for the next 5 years and discount the free cash

flow to the present day, Micron’s intrinsic value should be around $80 billion for the

entire company or $70/share.

I’m giving this scenario a 50% probability here.

Under the best-case scenario, we are using a compound annual growth rate CAGR of 20%

over the next 5 years.

If we forecast Micron’s free cash flow for the next 5 years and discount the free cash

flow to the present day, Micron’s intrinsic value should be around $96 billion for the

entire company or $85/share.

I’m giving this scenario a 25% probability here.

If we add all these numbers here, Micron’s intrinsic value should be around $71/share.

In comparison, Morningstar estimated Micron’s fair value to be much higher at $90/share.

This means Micron stock should be fairly valued or undervalued at the time of making this

video.

So, will I buy Micron stock?

The answer is it depends on the price.

I will likely buy a small position in Micron stock if it is substantially undervalued and

have a much larger margin of safety to account for Micron’s risks.

I don’t have Micron stock in my portfolios at the time of making this video.

I believe Micron’s biggest risk is that its business is very cyclical.

Micron’s revenue growth is largely dependent on DRAM and NAND prices.

If there is a large decrease in DRAM and NAND prices or if there is an oversupply of DRAM

and NAND products, Micron’s revenues and profits would drop significantly similar to

2019 and 2020.

Based on my estimates, I believe Micron’s intrinsic value is around $71/share.

I will update Micron’s intrinsic value every quarter whenever it releases its earnings.

If you want the latest intrinsic value update, you can download it on our Patreon in the

video description.

Now, all these estimates are only my opinions and my analysis based on my research.

They are not financial advice.

There are always risks associated with investing.

It’s important to always invest in what you know and not speculate.

You will need to do your own research and do your extra due diligence first before investing

in anything.

Thank you for watching this video and supporting our channel.

This is Victor from the Intelligent Investor Channel, and I will see you in the next video.