According to Fortune Business Insights, the semiconductor industry is expected to grow at a CAGR of 8.6% between 2021-2028. This growth will be driven by wider usage of chips in Artificial Intelligence (AI), the Internet of Things (IoT), machine learning technologies as well as higher consumption of consumer electronic devices.
However, over the past month the semiconductor industry experienced a minor selloff, as evidenced by the 3% loss in the iShares PHLX SOX Semiconductor Sector Index ETF (SOXX), compared to SPDR S&P 500 Trust ETF (SPY) 0.2% gains over the same period.
This dip is giving investors an opportunity to scoop up shares of quality semiconductor companies, such as Micron Technology, at cheaper prices. Based in Boise, Idaho, MU designs, produces, and sells memory and storage solutions across the globe. MU is a leader in two types of memory chips: Nand and DRAM. Nand provides longer-term data storage, while DRAM is used in PCs, smartphones, and other devices with a central processing unit.
Recent Quarterly Performance
In Q2, Micron’s revenue was up around 30% on a year-over-year basis to $6.24 billion. Moreover, the company easily beat Wall Street consensus estimates of $5.96 billion (beat by $30M). Also, the company reported Non-GAAP EPS of $0.98, beating Wall Street expectations by $0.03. The company’s net profit rose 48% from its year-ago value to $603 million.
For the third quarter, the analysts expect MU’s EPS to stand at $1.64 compared to $0.82 in the year-earlier period. Also, the company has beaten Wall Street consensus estimates in the past four consecutive quarters. Additionally, a $7.1 billion average revenue estimate for its third quarter of 2021 indicates a 33.7% improvement year-over-year.
The stock is trading near its average over the last 10 years Non-GAAP price to earnings (P/E) multiple of 22.65x and looks undervalued versus its industry’s median P/E of 27.05x. MU’s P/E has been as high as 51.61 and as low as 2.5, with a median of 9.95. Should the stock’s P/E multiple return to the industry’s median levels of about 27x, the shares could climb to around $148.5, using consensus average EPS estimates of $5.5 in 2021.
In addition, MU trades with a TTM PEG ratio of 1.31x, suggesting the stock is currently discounted, given a PEG ratio of 1-2x for a fairly valued stock.
Finally, Micron has a solid margin profile with 15.45% EBIT, 41.08% EBITDA, and 13.60% net income margins. These figures substantially outperform the industry’s median of 8.18% EBIT, 14.36% EBITDA, and 4.86% net income margins.
MU ownership and analyst coverage
Institutional ownership is approximately 82.66% of MU’s diluted shares. Most of this is The Vanguard Group, Inc., which owns around 83.25 million shares or 7.42%. Next are BlackRock Fund Advisors, PRIMECAP Management Co., and SSGA Funds Management, Inc. Their stakes stand at about 4.94%, 4.05%, and 4.04%, respectively. The rest of the owners hold relatively small stakes. According to CNN Business, approximately 16.8 million shares were bought by institutions, and 36.3 million shares were sold during the second quarter of 2021.
What is more, many analysts upgraded the company in the last six months, with a consensus price target of $114.86, representing 41.58% upside.
Bullish Options Bets
The options, which expire on January 21, 2022, saw increased call buying on Monday. The open interest for the $145.00 calls rose by 673 contracts to a total of 1,000 open contracts (source: barchart.com). A buyer of those calls would need the stock rise to $145.79 by the expiration date, a gain of about 79% from MU stock’s current price
Additionally, the $67.50 puts, which expire on January 20, 2023, have seen increased open interest levels by about 1,000 to a total of 1,204. However, what’s most interesting is that the puts were traded on a bid, which suggests that the contracts were sold. Having said that, it’s a large bullish bet. Consider that MU stock should stay above $75.80 to earn a profit for the options holder.
Not only is MU increasing earnings growth and the outlook for the semiconductor industry is positive, but the action in the options market is quite bullish. And due to the 9% pullback in it’s share price over the past month, I believe MU is attractive at these levels.
MU shares were trading at $81.17 per share on Wednesday morning, down $0.06 (-0.07%). Year-to-date, MU has gained 7.97%, versus a 12.39% rise in the benchmark S&P 500 index during the same period.