Micron Technology Inc (MU, Financial) experienced a daily gain of 1.35%, and a 3-month gain of 7.89%. However, the company reported a Loss Per Share of 5.34. This raises the question: is Micron Technology (MU) significantly overvalued? In this article, we will conduct a thorough valuation analysis to answer this question.
Company Introduction
Micron Technology is one of the largest semiconductor companies globally, specializing in memory and storage chips. Its primary revenue stream comes from dynamic random access memory (DRAM), with minority exposure to NAND flash chips. The company serves a global customer base, selling chips into data centers, mobile phones, consumer electronics, and industrial and automotive applications. With a current stock price of $68.88 and a GF Value of $46.06, it's crucial to analyze whether Micron Technology is trading at its fair value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
According to GuruFocus Value calculation, Micron Technology (MU, Financial) is significantly overvalued. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $68.88 per share and the market cap of $75.40 billion, Micron Technology stock is believed to be significantly overvalued.
Because Micron Technology is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. Micron Technology has a cash-to-debt ratio of 0.69, which ranks worse than 73.01% of 904 companies in the Semiconductors industry. The overall financial strength of Micron Technology is 6 out of 10, which indicates that the financial strength of Micron Technology is fair.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Micron Technology has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $15.50 billion and Loss Per Share of $5.34. Its operating margin of -35.59% is worse than 89.94% of 954 companies in the Semiconductors industry. Overall, GuruFocus ranks Micron Technology's profitability as fair.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Micron Technology is -9.1%, which ranks worse than 86.84% of 874 companies in the Semiconductors industry. The 3-year average EBITDA growth rate is -33.7%, which ranks worse than 94.85% of 776 companies in the Semiconductors industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Micron Technology's ROIC was -11.14, while its WACC came in at 11.28.
Conclusion
Overall, Micron Technology (MU, Financial) stock is believed to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 94.85% of 776 companies in the Semiconductors industry. To learn more about Micron Technology stock, you can check out its 30-Year Financials here.
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