Is Micron Stock really cheap? – The crazy fool

One indicator that many investors like to watch for judging the value of a company's stock is the price / earnings ratio, which is calculated by dividing the company's stock price by its profit. per share (EPS).

By this metric, specialist of the memory Micron (NASDAQ: MU) is comically cheap, trade at a P / E of only 3.51. In other words, this means that if Micron continued to earn what it had in the last 12 months, it would make a profit equal to the value of the company in just three and a half years .

Although the P / E ratio of the last 12 months is a useful measure, it is also important for investors to understand that when this figure seems excessively cheap, there is probably something else at stake. And with Micron, there is some .

Micron's revenues will fall

The reason why Micron's current price-earnings ratio is so low is simple: in the short term, investors are not expecting the company to generate as much net income as in the last 12 years month.

Indeed, according to analysts' estimates, the company should see its EPS decrease from $ 11.95 to $ 7.68 compared to the previous year, a decrease of nearly 36%. This fall occurred due to an oversupply of DRAM – Micron's largest revenue and profit engine – as well as NAND flash memory.

Do not forget that DRAM and NAND memories are products. As a result, the prices that Micron (and other memory manufacturers) can charge are ultimately dependent on the supply and demand of these chips throughout the industry. When supply is greater than demand, prices fall and when demand is higher than supply, prices rise (as they have been doing for a while before recent declines).

According to DRAMeXchange, DRAM prices are expected to fall by about 20% in the first quarter of 2019, and by 15% in the second quarter, a 32% decrease in both quarters. After that, DRAMeXchange says: "[T]The price decline will be moderate over the next quarters. "

Indeed, analysts are calling for a further dip in Micron's EPS, which will reach $ 6.53 in 2020, with revenues about stable.

Is Micron still cheap?

At the time of writing, Micron's shares are trading at $ 42.57, up significantly from the 52-week minimum of $ 28.29 recorded at the end of December 2018, but down from 34 % compared to the 52-week high. At this point, it is clear that investors have had the time to understand the fact that the memory pricing environment will likely be difficult for a while.

The good news, however, is that the Micron stock still seems relatively cheap compared to analysts' projected EPS for 2020, trading at only 6.52 times more than this projection. But it's still not as cheap as the P / E ratio of the last 12 months suggests.

Beware, if DRAM and NAND prices fall more aggressively than analysts expect, or if declines persist longer than expected, then this estimate of $ 6.53 for 2020 may prove too high , or this estimate might not be successful, but it would be followed by further declines in 2021.

Take away food

The memory market regularly brings investors to delusional maneuvers Micron's gross margin percentage was in the early 20s just a few years ago and its free cash flow was clearly negative. The rapidly growing memory market, coupled with some improvements in product and technology execution from Micron, drove the company's gross margin and free cash flow to swell quite rapidly.

MU (gross profit margin) data by YCharts.

Now, the memory market is down and Micron's stock price and futures estimates seem to reflect it. If the CEO of Micron, Sanjay Mehrotra, said about the company's most recent results that "the memory sector is structurally stronger, with more diversified demand drivers and a capacity for growth of the more moderate supply "-, Micron's business should ultimately continue to be significantly profitable even at the end of this correction of the memory industry.

Ashraf Eassa does not hold any of the shares mentioned. The Motley Fool has no position in any of the actions mentioned. Motley Fool has a disclosure policy.