We previously covered Micron Technology (NASDAQ:NASDAQ:MU) in April 2024, discussing why we had maintained our Hold rating, despite the excellent FQ2'24 earnings, promising FQ3'24 guidance, and numerous growth opportunities from the ongoing generative AI boom.

With the stock pulling forward much of its upside potential and its dividend investment thesis underwhelming, we did not believe in chasing this stock over the cliff.

Author Rating

Well, we had rated MU as a Hold in four consecutive articles since April 2023, concluding that the stock had been too expensive.

On the one hand, it appeared that we had missed the boat as the stock charted an eye-watering rally of +118%, well outperforming the wider market at +31.9% since April 2023. Otherwise, by +10.6% and +8.2%, respectively, since the April 2024 article.

Despite the robust generative AI tailwinds for MU's HBM and SSD segments, we maintain our belief that there remains a minimal margin of safety here, with the normalization in its valuations only being a matter of time and the stock likely to further pullback in the near-term as the wider market enters correction zone.

MU's Growth Prospects Seem Extremely Bright

The drastic correction has already been observed in the market's over reaction to MU's FQ3'24 double beat earnings results and (in our opinion) excellent FQ4'24 guidance offered in July 26, 2024, with the stock losing -7.1% of its value within one day, or by -16% since the recent peak on June 18, 2024.

For reference, the memory chip company reports FQ3'24 revenues of $6.81B (+17% QoQ/ +81.6% YoY), gross margins of 28.1% (+8.1 points QoQ/ +44.2 YoY/ -18.8 from its FY2019 levels of 46.9%), and adj EPS of $0.62 (+47.6% QoQ/ -56.6% YoY).

Interestingly, MU's FQ4'24 revenue midpoint guidance of $7.6B (+11.6% QoQ/ +89.5% YoY) and adj EPS midpoint guidance of $1.08 (+74.1% QoQ/ +200.9% YoY) have oddly disappointed the consensus as well.

This is despite the supposed beat against their forward estimates at $7.58B (+11.3% QoQ/ +89% YoY) and $1.02 (+64.5% QoQ/ +195.3% YoY), respectively.

This is also why we have concluded in our previous article that MU's premium valuations have come with great expectations, with the market over reacting to the forward guidance and with it bringing forth painful corrections after the FQ3'24 earnings call.

The Consensus Forward Estimates

While MU has opted to not offer any FY2025 guidance yet, they have already hinted at "record revenue and significantly improved profitability in fiscal 2025," implying that the consensus FY2025 revenue estimates of $36.91B (+48.6% YoY) may not be overly aggressive indeed.

This is especially since HBM sales are expected to grow tremendously from "several hundred million dollars in fiscal 2024 to multiple billions of dollars in fiscal 2025," with its "share for HBM to be in line with our DRAM share sometime in 2025" and HBM market size growth at a CAGR of over "+50% over the next few years."

With MU currently reporting an average DRAM market share of 24% in 2023 (Q1, Q2, Q3, Q4) and TrendForce estimating a HBM market size of $16.91B in 2024 (+288.7% YoY) and the same market expanding to $25.36B in 2025 (+50% YoY), it appears that the former may report up to $6B in HBM revenues in 2025, if not more, if Samsung (OTCPK:SSNLF) fails to qualify with Nvidia (NVDA).

As a result, we believe that the consensus forward estimates appear to be reasonable for now, with it also mirroring NVDA's projected top-line growth at a CAGR of +44.7% and to a lesser extent, Advanced Micro Devices' (AMD) at +19.3% and Intel (INTC) at +8.2%, as MU intensifies its HBM qualification processes with other customers beyond NVDA.

MU Valuations

As a result of the robust growth prospects and promising consensus forward estimates, we believe that MU trades more attractively at FWD P/E of 17.38x, down from its 1Y mean of 35.15x, though still elevated from the hyper-pandemic averages of 13x and pre-pandemic averages of 8.3x.

Even so, readers must note that MU continues to trade at a premium compared to its direct peers, such as SSNLF at FWD P/E of 11.84x and SK Hynix at 7.54x.

This is despite MU expected to chart an underwhelming normalized bottom-line growth at a CAGR of +9% between FY2019 and FY2026, compared to SSNLF at +10.7% and SK Hynix at +22%, implying that the former remains expensive here, offering interested investors with a reduced margin of safety.

MU's Historical Valuations

Readers must also note that historically, MU has traded closely to its memory peers as shown in the image above, implying that we may see the former's valuations further moderate nearer to its peers and the 5Y P/E mean of 13.39x.

At the same time, MU highlighted that demand has been gated by supply in the recent earnings call, with "bit supply growth in fiscal 2024 remains below our demand growth for both DRAM and NAND" and its "HBM is sold out for CY24 and CY25 with pricing already contracted for the overwhelming majority of our 2025 supply."

This is why the management has highlighted intensified capital spending from FY2025 onwards, with the capex guidance of mid 30% range of FY2025 revenues being higher than the 26.6% reported on a YTD basis and nearing the 39.2% in FY2022.

It is apparent that the semi foundry business is one that is highly cyclical while being cash heavy as well, especially since MU only reported $425M of Free Cash Flow in FQ3'24, compared to -$29M in FQ2'24 and -$1.36B in FQ3'23.

While the management has recently repaid their debts maturing in 2025, readers must note that they are still looking at $3.31B of debts maturing through 2027.

Therefore, investors may want to temper their near-term expectations, since MU is unlikely to drastically increase its dividend payouts over the next few years as it capitalizes on the generative AI boom.

So, Is MU Stock A Buy, Sell, or Hold?

MU 5Y Stock Price

For now, MU has charted a new height of $153s before returning much of those gains to retest the previous support of $130s.

Despite so, the stock continues to trade higher than the 50/ 100/ 200 day moving averages and our original long-term price target of $134.50, based on the consensus FY2026 adj EPS of $10.05 and the 5Y P/E mean of 13.39x.

Even when taking into account the consensus' recently raised FY2026 adj EPS estimates by +17.7% to $11.83 and the same 5Y P/E mean of 13.39x, there remains a minimal upside potential of +19.7% to our updated long-term price target of $158.40.

MU YTD Stock Prices

At the same time, with MU and NVDA already displaying a head and shoulder pattern since April 2024, it appears that there may be more volatility in the near term as the wider market also pulls back and "locked in their profits" during the recent heights.

Anyone looking to add may consider doing so after a deep pullback to its previous April 2024 support levels of $110s for an improved margin of safety, especially since we are entering a deep correction zone with the top already blowing off.

Patience may be more prudent here.