Monday, January 27, 2014 8:18:31 AM
Just the MU bits...
Technology (MU) and medium-sized positions in BP plc (http://bit.ly/yQLIVc) and Anadarko Petroleum (http://bit.ly/Jr1Qou). MU is a manufacturer of semiconductor memory chips (DRAM and NAND flash). This isn’t our first go-round with MU; it was a large short position from January 2001 to February 2005. Back then, DRAM was a lousy industry with too many competitors selling an undifferentiated product, often below cost. In the first quarter of 2001 when the shares were trading in the low $40s we wrote:
MU is valued at 6.5x current run-rate revenues and, today, generates no profits. In its best year ever (fiscal 2000), MU recorded $2.52 per share of earnings, making the current price 17x the peak earnings of a cyclical, commodity manufacturer. In the previous two years, MU lost money.
At the time, the valuation was kept aloft by the hopes and dreams of sell-side analysts. In our next letter we shared the following anecdote:
In an exchange of e-mails with a leading sell-side analyst who recommends purchase of MU with a $70 per share target, we solicited his justification for the current $24 billion market capitalization (let alone the $40 billion suggested by his target.)
Our analyst friend explained he tried to use cyclical valuation methodologies to come up with a rationale for buying the stock but failed because such an approach suggests “the stock should trade in the teens.” However, he maintains, should we have a good pricing environment next year, “people will treat the stock the same way [as they have] and take it much higher than they should.” Lest we be unclear about his raison d’être, he added he “could just perennially stamp an underperform on MU because he can’t justify the $24 billion, but that would be boring.” He need not worry; we are fans of boring.
This sort of unchecked cheerleading among sell-side analysts is by no means gone. Today, they spin different fables to justify otherwise inexplicable valuations for the latest flavor-of-the-month stocks. As for MU, a decade of poor results exposed every flaw in the business and killed any love for the stock. The sell-side groupthink has reversed: the mostly bearish analysts now contort themselves to justify earnings estimates that are too low, price targets that are too pessimistic, and stock ratings that are too negative.
We established a position in MU at an average price of $16.49, marking the first time we have taken a long position in a company in which we once had a material short position. The industry has changed and so has MU. Its purchase of Elpida Memory out of bankruptcy in August 2013 marks the end of a decade of consolidation from roughly a dozen major DRAM players down to just three. Technological advances and locked-up intellectual property have made it unlikely that any new players will enter the industry in the intermediate term.
MU and its competitors have signaled that they will refrain from adding capacity and will instead prioritize economic value-add. For the first time in memory, MU intends to use its excess cash flow to shrink the outstanding share count rather than build new factories. We believe the company will approach $4 per share of earnings and free cash flow in calendar 2014, and should enjoy a better multiple as investors begin to appreciate the new dynamic. The shares ended the quarter at $21.75.
Recent MU News
- Micron First to Ship Critical Memory for AI Data Centers • GlobeNewswire Inc. • 05/01/2024 01:02:00 PM
- BHP Bids $38.8 Billion for Anglo American; Biden Unveils Historic Micron Technology Deal, and More News • IH Market News • 04/25/2024 11:48:40 AM
- Micron, Biden-Harris Administration, U.S. Senate Majority Leader Schumer Announce $6.1B in CHIPS and Science Act Funding for Historic Planned Investment in Domestic Leading-Edge Memory Manufacturing in Idaho and New York • GlobeNewswire Inc. • 04/25/2024 09:10:00 AM
- Apple to Invest $250 Million in Singapore Expansion, Oracle Commits $8 Billion to Japan Infrastructure, and More News • IH Market News • 04/18/2024 11:11:52 AM
- Micron First to Production of 200+ Layer QLC NAND in Client and Data Center • GlobeNewswire Inc. • 04/16/2024 01:02:00 PM
- Micron’s Full Suite of Automotive-Grade Solutions Qualified for Qualcomm Automotive Platforms to Power AI in Vehicles • GlobeNewswire Inc. • 04/10/2024 06:00:00 AM
- Micron Debuts World’s First Quad-Port SSD to Accelerate Data-Rich Autonomous and AI-Enabled Vehicle Workloads • GlobeNewswire Inc. • 04/09/2024 06:00:00 AM
- Micron Provides Update Following Earthquake in Taiwan • GlobeNewswire Inc. • 04/03/2024 12:30:00 PM
- Dow, S&P 500 Give Back Ground But Nasdaq Inches Higher • IH Market News • 04/01/2024 08:58:32 PM
- U.S. Stocks Pull Back Well Off Best Levels But Closely Mostly Higher • IH Market News • 03/21/2024 08:34:43 PM
- Apple Pre-Market Drop Due to Antitrust Threats, Surprising Profit Boosts Micron Shares, and Latest Market Updates • IH Market News • 03/21/2024 11:17:26 AM
- Micron Surges on Unexpected Profit, Five Below and Guess Report Mixed Results • IH Market News • 03/21/2024 09:18:02 AM
- Micron Technology, Inc. Reports Results for the Second Quarter of Fiscal 2024 • GlobeNewswire Inc. • 03/20/2024 08:06:29 PM
- U.S. Index Futures Trade Sideways Amid Anticipation of Fed’s Policy Update; Oil Prices Dip • IH Market News • 03/20/2024 11:17:32 AM
- Form 8-K - Current report • Edgar (US Regulatory) • 03/11/2024 08:29:16 PM
- Micron Appoints Robert Swan to its Board of Directors • GlobeNewswire Inc. • 03/11/2024 08:01:00 PM
- Form 144 - Report of proposed sale of securities • Edgar (US Regulatory) • 03/08/2024 09:16:59 PM
- Futures Turn Positive Following Monthly Jobs Report • IH Market News • 03/08/2024 02:03:54 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 03/08/2024 12:01:42 AM
- Micron Releases ‘What Makes Us Micron’ 2023 Diversity, Equality and Inclusion Report • GlobeNewswire Inc. • 03/05/2024 09:05:00 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 02/29/2024 11:46:45 PM
- Form 144 - Report of proposed sale of securities • Edgar (US Regulatory) • 02/27/2024 09:08:55 PM
- U.S. Stocks May Lack Direction Following Yesterday’s Modest Pullback • IH Market News • 02/27/2024 02:14:46 PM
- Expedia Announces 1,500 Job Cuts; Hims & Hers Surges 19.8% Post Financial Results, and More News • IH Market News • 02/27/2024 11:15:07 AM
- Micron Collaborates with Samsung on Galaxy S24 Series to Unlock the Era of Mobile AI Experiences • GlobeNewswire Inc. • 02/27/2024 08:00:00 AM
NanoViricides Reports that the Phase I NV-387 Clinical Trial is Completed Successfully and Data Lock is Expected Soon • NNVC • May 2, 2024 10:07 AM
ILUS Files Form 10-K and Provides Shareholder Update • ILUS • May 2, 2024 8:52 AM
Avant Technologies Names New CEO Following Acquisition of Healthcare Technology and Data Integration Firm • AVAI • May 2, 2024 8:00 AM
Bantec Engaged in a Letter of Intent to Acquire a Small New Jersey Based Manufacturing Company • BANT • May 1, 2024 10:00 AM
Cannabix Technologies to Deliver Breath Logix Alcohol Screening Device to Australia • BLO • Apr 30, 2024 8:53 AM
Hydromer, Inc. Reports Preliminary Unaudited Financial Results for First Quarter 2024 • HYDI • Apr 29, 2024 9:10 AM