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Soid Ahmad
Soid Ahmad
Articles (195)  | Author's Website |

Micron: The Market’s Search for Cyclicality

Fear of cyclic downturn keeps the stock price under pressure. Micron can be an outperformer in 2018

December 28, 2017 | About:

Micron (NASDAQ:MU) has been a favorite of Wall Street investors for quite some time. And who could blame them? The company's stock rose by more than 87% in the last 12 months of 2017.

The company's first fiscal quarter 2018 earnings report showed revenues were 71% higher compared to the same period last year. That amounts to a $6.8 billion increase in revenues.

Micron beat Wall Street's projections by $410 million, records show. The company reported $2.45 in earnings per share during the period, exceeding Wall Street's expectations.

GuruFocus's Peter Lynch valuation tool paints quite a favorable picture for Micron.


But, at the same time, investors know to weigh risk factors that can affect the durability of a stock.

For example, the company depends on sales of memory chips and Dynamic Random-Access Memory. So far, demand for these products has been strong as consumers depend on them to increase the capability of their mobile devices, cameras and computers. The market's need for greater data processing and storage capabilities has helped Micron maintain its super cycle.

But some fear demand for these products could decline as the company reaches a "cyclical peak." Analysts say demand can be quite volatile and have a major impact on earnings from quarter to quarter. In addition, the company faces competition from all sides. And there is concern about a declining industry environment.

Earnings insights

Let's take a look at the numbers to get a better idea of what's happened over the last year.

Micron posted revenue of $6.8 billion during the first quarter of 2018 compared to revenue of $3.97 billion during the first quarter of 2017.


Revenue growth was supported by double-digit growth in mobile, server and Solid State Drives (SSD) applications. SSD revenue from cloud/enterprise customers was up 50% sequentially while Dynamic Random-Access Memory (DRAM) shipments to cloud customers were up more than 50% on a year-over-year basis. According to Micron, increasing mobile device functionality is also boosting mobile memory and storage content. In addition, eSports, gaming and cryptocurrencies also contributed to Micron’s DRAM revenue during the quarter.

Regarding classification, the company generated 67% of its revenue from DRAM during the first quarter of 2017. NAND was responsible for 27% of the total revenue during the same period. From a business segment perspective, the company generated 47% of the total revenue from the compute and networking business (CNBU) during the first quarter of 2018. Storage business unit (SBU) and mobile business unit (MBU) contributed 20% each to  company revenue during the same period. Embedded business unit (EBU) brought in 12% of Micron’s total revenue during the first half of 2018. Fastest revenue growth was witnessed by CNBU, which doubled on a year-over-year basis. SBU and MBU grew 61% and 33% on a year-over-year basis, respectively.

Micron posted net income of $2.99 billion during the first quarter of 2018 compared to $335 million during the first quarter of 2017. Sequentially, the growth is less dramatic, 21% quarter-over-quarter.


On the one hand, earnings reflected explosive revenue growth. On the other, increasing margin also helped the company capture material bottom line gains. Gross margin for the quarter was 55.1% compared to 26% during the same quarter last year. This reflects increasing average selling prices of DRAM and NAND products, thanks to the proliferation of connected devices. DRAM gross margin increased from 28% during the first quarter of 2017 to 62% during the first quarter of 2018. NAND margin also increased from 23% to 49% during the same period. Moreover, the fact Micron generated more revenue from high-margin DRAM business compared to NAND business also boosted the bottom line of the company.

A search for cyclical decline

Analysts’ persistence in the notion of cyclic downturn is helping Micron beat estimates consistently. The company posted positive earnings surprises in each of the last four quarters. The surprise ranged from 4% to 10%. Given the stellar earnings, 26 analysts have revised their earnings estimates upwards in the last several days. After these revisions, the consensus is finally hovering around the management’s guidance for the second quarter of 2018.

The current price-earnings ratio stands at 6.8, according the GuruFocus.


The stock trades at a forward price-earnings of 5.1 while the Standard & Poor's 500 is trading around 25. A price-earnings of 5 is usually slapped on stocks that are in a downward spiral or losing market share. Micron, in contrast, witnessed 42% earnings growth during the past five years, and its earnings are set to grow 23% per year during the next five years, according to analyst consensus.

Such dichotomy between price and value of Micron can only be explained by the search for cyclical decline by analysts. Note that analysts are modeling for an earnings per share consensus of $8.64 for 2019, which is below the 2018 consensus of $9.77. The search for downturn is clearly reflected in the modeling. Gartner also thinks that a slowdown will follow in 2019 after continued favorable conditions for DRAM vendors in 2018.

“DRAM revenue will hit a new high of $65.6 billion in 2017 as the continuing undersupply allowed DRAM vendors to increase pricing. The undersupply will last through 2018, allowing further revenue gains, before a supply-induced downturn in 2019 as vendors add capacity and China enters the DRAM market.”

The point is that fear of cyclic downturn is embedded in almost every Micron valuation, which is keeping the stock price in check. 

Valuation update

The valuation that follows is an update of the previous valuation and incorporates the updated forecast based on first quarter earnings and second quarter guidance.


· Earnings are expected to grow at 7% annually from 2019 to 2023.

· No growth is assumed in perpetuity.

· Cost of equity is assumed to grow in line with earnings growth.

· CAPM is used to calculate cost of equity.












Dollars in million

Net Income









Cost of capital

r*capital invested









Adjusted Net Income








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Economic Value Added

















Market value added



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Value of the equity



Perpetual Growth in Residual Earnings


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Focus Equity Estimates

Economic value added valuation reveals an upside of around 65%. Note that this is a base case valuation as it’s based on earnings forecast of $7.47 for 2018. Consensus EPS stands at $9.77 for 2018. 

Final thoughts

Until last month, when Micron was trading around $48, it looked like the stock moved out of value into momentum territory. However, first quarter earnings paint a different picture as the stock looks like real value for 2018 given the fact that it trades at a forward price-earnings of 5 and has good growth prospects for 2018.

It appears that Micron will be among the top technology performers in 2018.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

About the author:

Soid Ahmad
Soid Ahmad is affiliated with the Association of Chartered Certified Accountants. He graduated from Oxford Brookes University. He also holds a Master's degree in Economics and Finance from HSRW Germany. He has been working as a technology analyst for several years and has an eye for mispriced technology stocks. He is also affiliated with Focus Equity, an independent equity research firm.

Visit Soid Ahmad's Website

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