To The Moon

$Micron Technology(MU)$

Introduction: Micron's Stock Price Drop

Micron Technology’s stock price recently fell by over 16% following the announcement by President Donald Trump that new tariffs would be imposed on U.S. trading partners. Although Micron is based in the U.S., it has a significant global footprint, with operations in Japan, Taiwan, Singapore, and China. As a result, these new tariffs are expected to drive up its cost of goods sold. This poses a challenge for the company, particularly as it navigates the complexities of international trade and supply chain disruptions. However, Micron has made considerable investments in the U.S. over recent years, with planned expansions in New York and Idaho. These investments could help offset some of the additional costs imposed by the tariffs, provided they remain in place long-term.

Reassessing Micron Stock

Given these new developments, it’s time to take a fresh look at Micron’s stock, considering both the current market conditions and the company’s long-term prospects. In particular, we need to assess its newly lowered valuation and determine whether it’s still a good investment—whether it should be a buy, hold, or sell.

Stock Price Overview and Market Performance

Micron's stock price has fallen sharply to about $64.72, which is near its 52-week low. This marks a significant drop from where the stock was trading earlier in the year at around $90 per share. As someone who has rated Micron as a buy all year, I am disappointed by this performance. The stock has significantly underperformed compared to my initial expectations. However, despite the recent downturn, it’s important to ask whether this sudden drop has altered my outlook on the stock. To answer that question, we need to dig deeper into the company’s performance over the past decade and how it is currently positioned in the market.

Micron’s Cyclical Nature and Revenue Forecast

Micron Technology has long been known for its cyclical nature, with its revenue and profits ebbing and flowing every couple of years in line with the semiconductor cycle. This cycle has been driven by various factors, including supply and demand for memory chips, fluctuations in capital expenditures, and technological advancements. As we look at the current cycle, we can see that it is no different from past cycles, but it’s just beginning to gain momentum. Micron’s trailing 12-month revenue is around $31 billion, and the company’s management has forecasted strong revenue growth for 2025. However, due to the tariffs, it’s likely that this growth forecast will be revised downward. The exact extent of the impact remains to be seen, but it is clear that the new tariffs will put some pressure on the company’s future revenue growth.

Micron’s Strategic Position in the AI Market

Despite these challenges, there are several positive factors supporting Micron’s business model. One of the biggest is the company’s significant role in the expansion of data centers optimized for artificial intelligence (AI). Micron is a key partner of Nvidia, providing memory and storage for data centers, which are being increasingly optimized for AI workloads. This collaboration is helping Micron to establish itself as an integral part of the AI-driven data center boom. Additionally, Micron stands to benefit from the growing trend of embedding more advanced technology into consumer electronics. As smartphones, laptops, personal computers, and even cars are equipped with increasingly sophisticated features—many of which are AI-driven—demand for memory chips and storage solutions is on the rise. This trend is particularly significant in the smartphone market, where consumers are opting for higher-priced devices that feature enhanced AI capabilities.

Growing Demand for Micron’s Products

Reports from major smartphone manufacturers indicate that while the overall unit growth in the industry has remained flat, consumers are spending more on higher-end models with more technology integrated into them. This is a positive development for Micron, as it can sell more units at higher average selling prices, boosting both revenue and profitability. The increasing adoption of AI across various sectors means that Micron’s products are likely to remain in high demand, particularly as more devices are optimized for AI capabilities.

Operational Strengths and Cash Flow

In terms of Micron’s operational performance, the company has demonstrated a strong cash flow from operations, which has been a consistent strength over the past year. Micron's cash-to-sales ratio was particularly strong at 42% in the most recent period, signaling that the company is managing its expenses well as it continues to benefit from the expanding semiconductor cycle. Excluding the impact of tariffs, this cycle was expected to continue expanding for at least another year, driven by the replacement cycle for personal computers and laptops, along with a steady growth outlook for smartphones. Data centers optimized for AI, which have become a significant part of the growth story for Micron, are also expected to keep expanding in the coming years, driven by the insatiable demand for AI technology.

Industry Outlook Amid Tariff Concerns

Even with the added burden of tariffs, the industry overall is likely to continue growing, though at a somewhat slower pace. The demand for AI infrastructure is so high that even with increased costs of goods sold, the overall industry growth is unlikely to slow significantly. Companies like OpenAI have already indicated that AI systems like ChatGPT are reaching their limits in terms of current infrastructure capacity. As demand for AI capabilities soars, Micron’s role in providing the memory and storage solutions for these AI-driven systems will remain crucial, helping to drive future revenue growth.

Micron’s Long-Term Prospects

Micron has also been successful in generating strong returns on investor capital, which reflects the company’s ability to manage costs and drive profitability even in a challenging market. Over the past decade, Micron has made significant investments in research, development, and manufacturing capabilities, which have paid off in the form of increased demand for its products. The company’s investments in cutting-edge technology have positioned it well to capitalize on the growing need for memory and storage solutions across various industries, from consumer electronics to AI data centers. The response from customers to these innovations has been more positive than expected, further validating the company’s strategic decisions.

Impact of Tariffs on Micron’s Recovery

However, despite these strong fundamentals, the tariffs present a significant challenge for Micron in the short term. They add uncertainty to the business and could disrupt the ongoing recovery. It’s unclear how much the tariffs will impact Micron's ability to continue improving its return on investor capital, but the company’s long-term prospects remain strong. Micron has a proven track record of being able to navigate market fluctuations and remain profitable through both good times and bad.

Micron’s Valuation and Intrinsic Value

When it comes to valuation, Micron was already undervalued heading into these new tariff challenges, which is why I rated it as a buy earlier in the year. The stock was trading at a forward price-to-earnings (PE) ratio of less than 10 for much of the year, making it an attractive investment opportunity. Now, with the stock price having fallen further, the forward PE ratio has dropped to 5.8, which is the lowest I can remember for Micron. While this is an attractive valuation from an investor’s standpoint, it also reflects the added risks the company faces with the new tariffs in place. The impact of these tariffs on Micron’s cost of goods sold and its ability to generate revenue from end consumers is a key concern. The increased prices of consumer electronics could lead to reduced demand, which could affect Micron’s ability to sell its products.

Micron’s Intrinsic Value and Margin of Safety

Despite these risks, the current market price of $64 per share is significantly below the company’s intrinsic value, which I estimate at $154 per share. Even accounting for the heightened risks, the stock remains undervalued. While I have adjusted my free cash flow expectations downward due to the potential impact of tariffs and lower consumer demand, I’ve also factored in the lower risk-free rate, as bond yields have decreased. This has reduced Micron's cost of capital, further enhancing its long-term prospects.

Conclusion: Micron Stock Remains a Buy

Given the significant disparity between Micron’s intrinsic value and its current market price, I am maintaining my recommendation that Micron is a buy at these levels. While the risks from the tariffs are real and could lead to short-term challenges, the company’s long-term outlook remains strong, and its stock is trading at an exceptionally attractive valuation. Therefore, I believe that now is still a good time to invest in Micron, despite the uncertainties surrounding the current market environment.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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