Micron: Optimism Warranted But Overhype Warning Getting Closer (Downgrade)
Contributor since 2021 / 32892 Followers
Summary:
- Micron Technology stock has finally re-tested its early 2022 highs, justifying my optimism in MU at its cyclical lows.
- Micron remains a crucial beneficiary of the AI revolution as it aims to take share from SK Hynix with its HBM3E product.
- SK Hynix has unveiled a $1B investment to improve its advanced packaging and aims to entrench its leadership further.
- Micron will be pressured to do more, intensifying execution and potential oversupply risks.
- Optimism in MU isn’t misplaced, as its earnings have likely bottomed out. However, overhype danger is inching closer, warranting a downgrade out of caution.
JHVEPhoto
I last updated Micron Technology, Inc. (NASDAQ:MU) investors in late December, arguing why Micron’s improving fundamentals and price action are constructive for a further recovery. My thesis has played out accordingly, as MU re-tested the $100 level, reaching its previous highs last seen in early 2022.
As a result, I gleaned that it would be timely for me to assess whether investors who missed buying MU at its dips should chase the current levels, anticipating further potential upside.
Unless you live under a rock, I believe it is easy to comprehend that the Nvidia-led (NVDA) AI hype has enveloped most corners of the semiconductor value chain. From wafer fab equipment suppliers to chipmakers, Micron’s unique role as a leading memory chipmaker shouldn’t be understated.
Micron has also launched and commenced volume production in Micron’s HBM3E product for AI chips. As a result, it has likely increased investors’ confidence in Micron’s recovery from its 2023 hammering, potentially outperforming its previous guidance. Micron articulated that its offerings “will be integrated into Nvidia H200 Tensor Core GPUs.” Micron’s HBM3E solution will begin shipments in CQ2’24 to emphasize its near-term monetization potential. In addition, Micron is confident that its product offers a significant upgrade to the current offering “by consuming approximately 30% less power compared to competing HBM3E offerings.” Therefore, it’s aimed at helping improve the TCO for its AI chip customers, delivering a more robust value proposition.
Keen Micron followers should also know that Micron will need to compete aggressively with HBM market leader SK Hynix as the memory leaders battle to introduce more efficient memory chips for their customers. SK Hynix is not resting on its laurels, as the Korean memory chipmaker unveiled its plans to invest over $1B to improve its advanced packaging technology and entrench its leadership further. SK Hynix has prioritized “innovative chip packaging techniques” as critical to “maintaining SK Hynix’s lead in the HBM market.”
Therefore, I believe my thesis that MU operates in a commoditized market is corroborated. SK Hynix, Micron, and Samsung (OTCPK:SSNLF) will likely need to invest more aggressively to improve their advanced packaging technologies to gain share. With Micron’s fiscal second-quarter earnings release coming up on March 20, we should get an opportunity to hear from Micron management on their confidence in share gains against SK Hynix. Investors should also consider assessing insights on how much the expanded AI chips TAM could benefit the leading memory chipmakers, reducing the execution risks of heavy investments and pricing volatility.
Investors who underwent the steep collapse in 2023 should have understood that oversupply risks cannot be understated. Notwithstanding the dramatic earnings surge from Nvidia, justifying the incredible demand for AI chips, Micron doesn’t quite have an equivalent moat compared to the AI chips leader. Therefore, I believe it’s paramount for investors to assign much lower valuation multiples to MU, even as it looks to gain more share against SK Hynix while fending off the challenges from Samsung.
Analysts have also lifted their estimates for Micron through FY26, anticipating a steep recovery from the AI hype cycle. Based on MU’s FY26 adjusted EBITDA multiple of 6.6x, it’s more in line with its 10Y average of 5.6x, but still has the potential to go lower. Recall from my previous article about commoditized and cyclical players like MU. We want to buy more aggressively when MU’s valuation is higher (due to weak earnings, which could be at cyclical lows) but turn more cautious when earnings are expected to peak (lower multiples, but earnings could be at cyclical highs).
As a result, I gleaned that the risks/reward is much less attractive now, if I need to account for an adequate margin of safety. While I didn’t assess red flags (sell signals), I believe the opportunity for investors to wait for a steeper pullback before jumping in is apt.
Rating: Downgrade to Hold.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing, unless otherwise specified.
I Want To Hear From You
Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
A Unique Price Action-based Growth Investing Service
- We believe price action is a leading indicator.
- We called the TSLA top in late 2021.
- We then picked TSLA’s bottom in December 2022.
- We updated members that the NASDAQ had long-term bearish price action signals in November 2021.
- We told members that the S&P 500 likely bottomed in October 2022.
- Members navigated the turning points of the market confidently in our service.
- Members tuned out the noise in the financial media and focused on what really matters: Price Action.
Sign up now for a Risk-Free 14-Day free trial!
