One of the best-performing stocks in the last decade has been Micron Technology (NASDAQ: MU). This semiconductor giant has returned close to 1,000% to investors since August 2011, compared to the S&P 500 gains of 350%. However, while the S&P 500 is trading at record levels, MU stock is down 26% from all-time highs, providing investors an opportunity to buy the dip.
According to a report from TheFly, Morgan Stanley analyst Joseph Moore downgraded Micron stock from Overweight to Equal-Weight. Moore also reduced the stock’s 12-month target price to $105 from $75.
Moore explains the semiconductor industry might enter a downturn over the next few months which might drag share prices lower. While Micron has impressed analysts due to structural improvements over the years, it might underperform the broader market if DRAM prices start to decline going forward.
The analyst explained, “We were prepared to become more constructive under the right conditions, but ultimately it is about inflections in the cycle and trajectory of earnings estimate revision breadth -- the former approaching an earlier peak YoY pricing and latter approaching negative earnings risk that follows.”
Last week Susquehanna also noted that the average order-filling time for semiconductor companies touched a four-year high of 20.2 weeks as companies remain impacted by the ongoing pandemic.
Micron stock remains a long-term buy
While Wall Street is worried about an imminent downcycle that will drag shares of Micron and its peers lower, long-term investors should view the recent pullback as a buying opportunity. In the fiscal third quarter of 2021, Micron sales were up 36.5% year over year to $7.4 billion above consensus estimates of $7.23 billion. Its adjusted net income also surged to $1.88 per share in Q3, compared to the consensus figure of $172.
The semiconductor heavyweight’s stellar quarterly results were driven by strong memory demand and higher pricing. Sales from its dynamic random access memory or DRAM segment surged by 52% year over year and were up 23% on a sequential basis. This segment accounted for 73% of total Micron sales in Q3 while its NAND flash business that generated 24% of total sales experienced a top-line growth of 9% year over year. An improved pricing environment allowed MU to improve its gross margin to 42.9%, up from 33.2% in the year-ago period.
Further, Micron expects revenue of around $8.2 billion in Q4 with adjusted earnings of $2.30 per share and a gross margin of 47%. In the Q4 of fiscal 2020, it reported gross margins of 34.9%, and earnings of $1.08 per share, while sales stood at $6.06 billion.
We can see that Micron will more than double its profit margins while sales might rise about 35% year over year, indicating the company benefits from high operating leverage.
What next for MU stock?
Micron is a company with five primary business segments that include data center, graphics, mobile, auto, and personal computers. Most of these businesses are poised to experience significant tailwinds in 202 and beyond. The data center segment will drive demand for DRAM and SSDs or solid-state drives.
The growing demand for PCs will also boost demand for SSDs while the transition towards 5G devices will positively impact mobile sales. Further, according to a research report, automotive memory demand is estimated to grow at an annual rate of 24% in the next few years.
MU stock remains reasonably valued with a forward price to 2022 sales multiple of 2.16x and a price to earnings multiple of just 6.22x. Comparatively, its earnings are forecast to rise at an annual rate of 64% in the next five years.
Analysts covering Micron stock have a 12-month average price target of $117 which is 67% above its current trading price.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
