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Is Micron’s share price good value despite cyclical risk?

Micron’s [MU] share price had a bit of a resurgence in November. The stock gained over 20% during the month, closing 30 November at $84. That’s a remarkable turnaround in form considering that between 12 April and 13 October the stock had declined over 30%, going from $95.19 to $66.68.

Yet, investors weighing up Micron’s share price should remember it is a cyclical stock. And while demand is high for  the computer chip memory it manufactures (known as DRAM and NAND chips) that could all change over the next few years. Simply put, the more product the cheaper it sells for.

Should investors pick up the stock  to ride a bullish wave? Or should they be wary of a cyclical stock, albeit one with a relatively high degree of room still to grow?

 

 

 

Is Micron’s share price a cyclical risk?

Micron’s share price suffered at the end of last decade as a glut of DRAM and NAND chips flooded the market. According to The Motley Fool’s Leo Sun, Micron saw sequential revenue declines between Q4 2020 and Q4 2021.

With any cyclical stock, the danger is that while demand for PC chips is high - thank you pandemic - that won’t always be the case, especially with manufacturers ramping up production. Sun points to research from Gartner and Trendforce that shows demand for DRAM chips, which made up the bulk of Micron’s revenue this year, is likely to decline in 2022.

​​Micron’s own industry outlook for 2022 sees sales of its chips growing. According to an investor presentation accompanying fourth quarter results DRAM demand will grow at a CAGR of mid-to-high teens percent. While NAND growth is looking at a CAGR of approximately 30%.

$31.86billion

Micron's estimated full yeat revenue for 2022, up 15% year-on-year

 

The market may not bottom out in quite the same way as in 2019. Sun suggests that demand for 5G devices, video game consoles and PCs and data centers will remain strong next year and highlights that analysts expect Micron's revenue and earnings to see double digit growth in the next couple of years.

According to data from Yahoo Finance, analysts expect Micron’s full year revenue 2022 to come in at 31.86B, up 15% year-on-year, on earnings of $8.76 a share. For 2023, expectations are for revenue of $37bn, up 16.1% year-on-year, on earnings of $10.64 a share.

 

Where next?

Broadly speaking, Micron expects its own growth to be in-line with the industry, with the investor presentation suggesting the company would ‘deliver record revenue with solid profitability in FY-22’. Supply chain constraints are also expected to ease in 2022.

“The demand outlook for 2022 is strong, and Micron is delivering innovative solutions to our customers, fueling our long-term growth,” said CEO Sanjay Mehrotra following fourth quarter earnings.

This year demand has certainly been strong. In the fourth quarter, revenue came in at $8.27 billion in the fourth quarter, up from $7.42 billion for the prior quarter and $6.06 billion for the same period last year. Diluted earnings in the fourth quarter were $2.42, a substantial jump from $0.87 in the same period last year.

“The demand outlook for 2022 is strong, and Micron is delivering innovative solutions to our customers, fueling our long-term growth” - Micron CEO Sanjay Mehrotra

 

Micron’s share price trades at just 9x its forward earnings, making it relatively inexpensive, with an average $98.85 price target from the analysts suggesting a 17.6% upside on Tuesday’s close.

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