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Why Micron Stock Looks Poised to Deliver Strong Returns

Micron Technology (NASDAQ:MU) is a leading semiconductor company focused on memory and storage chips. Historically, MU stock has undergone many boom-and-bust cycles, with numerous swift gains and many sickening declines. From the dot-com boom …

Micron Technology (NASDAQ:MU) is a leading semiconductor company focused on memory and storage chips. Historically, MU stock has undergone many boom-and-bust cycles, with numerous swift gains and many sickening declines. From the dot-com boom through 2009, for example, MU stock fell from a peak of $100 to a trough of just $3.

Source: Piotr Swat / Shutterstock.com

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In recent years, Micron has enjoyed a steadier climb and is now close to its all-time highs from 22 years ago. However, old memories don’t fade quickly.  Many investors are still afraid of Micron crashing once again, for which the memory chip producer has become known.

However, this time is different, even though I hesitate to use that phrase which has often been discredited. But here’s why MU stock may rise a lot farther than the skeptics expect.

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Semiconductors Are Becoming Less Cyclical

Historically, the biggest problem with semiconductor stocks in general and MU stock in particular has been the sector’s demand cycle.

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Semiconductor demand is driven by the overall health of the economy and of consumer spending in particular. Also, innovative products can ultimately result in big losses for chipmakers. For example, a hot-selling new consumer electronic device, such as a very popular smart phone, can cause an unprecedented surge in demand for chips.

Typically, semiconductor firms have ramped up supply and invested heavily to meet these spikes. However, once the demand peaks pass, producers are left with excess capacity, and their inventories pile up as their profit margins plunge.

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Micron has been particularly vulnerable to this cyclicality, as its memory chips are a largely commoditized product with lower barriers to entry than more specialized categories such as analog chips.

However, Micron’s outlook is improving on this front. For one, much of semiconductors’ growth has become less cyclical. Trends such as smart cars and the Internet of Things have greatly expanded chips’ overall addressable market. At the same time, these trends have reduced the volatility of the demand for chips.

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And within the memory chip space in particular, there has been a great deal of consolidation. That is, weaker players have merged or exited the industry. So Micron’s strategic position is much stronger than in the past. As a result, the demand for its products should be smoother than in the past, while Micron will also have an easier time managing its inventory and product mix on the supply side.

Long story short, Micron has fundamentally become a significantly better business than it used to be. Yet investors are still giving it a rather underwhelming valuation, due to its bumpy past.

Micron’s Valuation Is Eye-Catching

Analysts, on average, project that Micron’s earnings per share will be roughly $9 in its fiscal 2022. Based on a price for MU stock of $90 per share, that would result in a price-earnings ratio for the shares of just ten times. And it gets better.

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For FY ’23, analysts’ mean EPS estimate is  $11.81. If  that estimate proves to be accurate, the company’s forward P/E ratio would be less than eight times.

Profit is hardly the only metric that paints Micron in a flattering light. On an EV/EBITDA basis, Micron is trading for just 6.6 times, making it one of the cheapest large-cap tech stocks right now.

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Micron’s cash-flow-yield is above 5%. Despite the relatively high capital intensity of its businesses, Micron still is able to generate plenty of free cash flow from its operations.

Micron Is Returning More Cash to Shareholders

And in recent years, Micron has begun sharing more of its wealth directly with its shareholders. Before that, Micron wasn’t able to return very much capital to its shareholders because it had high debt loads and elevated capital expenditures.

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However, since the company has improved its balance sheet, it can now share more of its wealth with its shareholders. It initially did that with a share-buyback program. Since 2018, Micron has retired more than 90 million shares of its own stock, with most of its buybacks occurring at prices far below where its shares trade today. The buybacks have created tremendous value for its shareholders.

And last fall, Micron launched a 10 cent per share quarterly dividend. That’s not a big dividend by any means. However, the dividend can rise tremendously in the future. Additionally, by paying a dividend, Micron made its stock eligible to be bought by mutual funds and exchange-traded funds (ETFs) that focus on income-producing stocks.

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The Verdict on MU Stock

I understand why investors are still skeptical about Micron. The company has a long history of disappointing investors just when its prospects seemed most promising. The fluctuating  demand for its memory chips, in particular, has always reared its ugly head and knocked down the price of its shares.

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Those concerns are still valid. Micron’s semiconductors are more commoditized than those of most other chip makers. Thus, its stock should trade at a discount to other semiconductor players.

However, that discount seems too steep at the moment. That’s especially true because of  the persistent increase in the demand for semiconductors and the global economy’s current supply chain issues. In light of these points, Micron should continue posting strong earnings for quite awhile.

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On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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