Micron Technology Is Still a Massive Bargain

The chipmaker is David Tepper's top holding

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Jul 27, 2018
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Since the beginning of 2016, Micron Technology Inc. (MU, Financial) has risen more than 275% on the back of explosive growth in revenue and net income.

Micron’s memory and storage hardware are in high demand, especially as data analytics, data mining and artificial intelligence require massive memory consumption and storage capacity.

Many on Wall Street expect the company to earn over $11 a share in each of the next two years. That represents 40% of its current market price. Additionally, while Micron’s growth will slow down, the value at the point it does will be much higher than it is today.

The challenge is market conditions. If the top layer of technology stocks fall, many suppliers below them will too. To date, the only hiccup has come from Facebook (FB, Financial), and that was more a product of poor management than brand.

Global internet penetration will grow to over 80% by the late 2020s, allowing regions across Africa, South America, the Middle East and parts of Asia to experience their own internet revolutions. Startups in India are already showing signs of taking on Silicon Valley. These regions will represent the biggest growth opportunities for tech companies, and the semiconductor companies that supply them, over the next two decades.

Anything requiring memory or storage will mean Micron has a good chance of being the supplier. Also, with the introduction of 5G wireless speeds in the developed world, a wide range of new technologies will emerge, from augmented reality to autonomous vehicles to smart cities. This will also demand even more powerful computational hardware. Again, Micron will be at the top of the list.

The company has suffered from some pretty bad press lately. A former employee in Taiwan stole key technology from the company and is now collaborating with Chinese memory startups to enter the DRAM and NAND flash markets. Not much investors can do there. To make matters worse, Chinese antitrust authorities are investigating Micron, Samsung (XKRX:005930, Financial) and SK Hynix (XKRX:000660, Financial) for price-fixing the DRAM market as costs soared over the last 12 months.

With the Trump administration's trade war heating up, China has banned roughly 26 Micron products, but the company said the banned products might only affect 1% of sales. Any further additions would force Micron to change where it sells its products. Right now, demand is outpacing supply by enough that the world actually needs the company to keep producing. It has invested more than $2 billion over the last 12 months on research and development, holds over 24,000 patents and continues to file roughly 100 new patents each year. It has another $7 billion in cash to spend.

Chinese competitors are always a threat because the vast amount of labor and low costs make it profitable to take almost anything we can make U.S. and do it for less. In fact, China 2025 is a government plan to make the country independent of foreign technology by 2025. This may have unintended consequences, however, and is certainly not a sure-fire guarantee of success.

Analysis

In the last decade, Micron has booked a net loss for the year four times. However, looking to the future paints a fairly bright portrait of dominance and growth. The stock just isn’t trading that way. Even insiders have been selling, with executives and directors taking more than $10 million off the table since May. The old saying is insiders sell for many reasons, so with 1.2 billion shares outstanding, a couple hundred thousand isn’t going to mean much. What does mean something is guru investor David Tepper (Trades, Portfolio) still owns over 35 million shares, representing close to 20% of his total holdings.

It’s a Micron future, but the stock trades like it’s going out of business. That’s a mistake.

Disclosure: I am not long or short MU.