Micron Technology Valuation

Recently, I've been seeing some talk about Micron Technology, so I wanted to take a quick look at it. Full disclosure: I do not own any MU shares, and this is just my *cursory* valuation of the company from a value investor's perspective. *That said,* I am also a Computer Engineer, and I believe I at least somewhat understand this industry. # Business Story Micron Technology is one of the three dominant global suppliers of memory, alongside competitors Samsung and SK Hynix. As of writing this, its market share is about 20-25%. Considering its recent run-up in price, there is no question that Micron Technology enjoys significant competitive advantages - namely, in the form of patents and contracts for its proprietary DRAM, HBM, and NAND memory technology. I believe that we are currently in a bullish stage of the economic cycle, and considering that MU is a cyclical memory company, it is now overvalued compared to its fundamentals. While it is true that it's receiving tailwinds in demand from AI data centers, its performance as a company still relies upon this demand - hence its cyclicality. That is to say, while a higher baseline is perhaps in order, it is still a cyclical company. # Valuation In order to get a more holistic view of earning power, considering the cyclicality of the business, I believe it would be necessary to normalize earnings to revenues. While some might suggest this understates earnings, it only applies an "average" profit margin to the currently higher revenues. This actually reflects the current size of the firm, without the bias introduced by a bullish stage of the business cycle (and the respective higher margins it provides). Secondly, I think it would be important to capitalize R&D. Copying logic from Aswath Damodaran's school of valuation, R&D is a valuable asset that affects future profitability, which means it would be inappropriate to treat it as an operating expense. Based on MU's industry, I think the amortization period should be 5 years. Here is how I capitalized R&D: * 2025 - R&D Expense: $3798 - R&D Asset: $3798 - R&D Amortization: $0 * 2024 - $3430 - $2744 - $686 * 2023 - $3114 - $1868 - $622.8 * 2022 - $3116 - $1246 - $623.2 * 2021 - $2663 - $532.6 - $532.6 * 2020 - $2600 - $0 - $520 * R&D Asset: $10188.6 million * R&D Expense: $3798 * R&D Amortization: $2984.6 Here is how I derived normalized net income: Net Income = (Profit Margin Over the Past 5 Years) x (TTM Revenues) + TTM R&D Expense - TMM R&D Amortization = 14.23% x $58119 million + $3798 million - $2984.6 million = \~$9081.4 million. Shares outstanding should also be diluted by any stock-based compensation outstanding. Luckily, there is not too much of this, and I come to a final number of shares equal to 1153 million. Normalizing dividends (including stock buybacks) via the same method, I come to an augmented dividend figure of $2800 million. This makes the payout ratio about 30.83%. Return on equity is equal to this, after adding the R&D asset: 9081.4/(48633+10188.6) = 15.44% What does all this really mean? Well, I'm just using this to come to an understanding of the immediate annualized growth that could be expected in the coming 5-year period. Using normalized earnings, payouts, and return on equity, I can estimate the fundamental growth rate: FGR = Retention Ratio x Return on Equity = (1-.3083)x0.1544 = 10.68% Assuming a long-term risk-free rate of 5.02% (the current US 30-Y government bond rate) and a AAA 30-Y corporate bond rate of 5.57%, I now have everything I need to plug values into the Benjamin Graham Intrinsic Value formula! **Predicted Value:** (9081.4/1153)x(8.5+2x10.68)x(5.02/5.57) = $212.0 per share. **No-Growth Value:** (9081.4/1153)x8.5x(5.02/5.57) = $60.34 This implies a speculative element (i.e., attributable to growth) of $706.2 in the current market price. **Market Implied Growth Rate:** (766.58/(5.02/5.57)/(9081.4/1153)-8.5)/2 = 49.75% The market price implies this growth annually for the next 5 years. **Margin of Safety:** 1-766.58/212.0 = -261.6% # Risk Assessment Valuation of a company is incomplete without understanding some of the elements of risk in the financial statements. **Inventory Turnover Days** 2021: 152.7 days 2022: 249.6 days 2023: 372.7 days 2024: 255 days 2025: 215.5 days Verdict: Time in inventory has been declining since 2023, as you might expect from increasing demand due to our place in the economic cycle. As can be seen, there was a sizable increase in 2023, likely a holdover from the economic slowdown in 2022. Generally, time in inventory shifts with supply and demand. **Receivables Turnover Days** 2021: 69.97 days 2022: 60.88 days 2023: 57.38 days 2024: 96.15 days 2025: 90.47 days Verdict: Credit owed to MU is taking longer to be paid off by as much as a month since 2023. This is a sign that cash flows are slowing down, as it is taking longer to turn sales into real income. **Short-Term Liquidity** Current Ratio: 2.897x Quick Ratio: 1.022x Verdict: Short-term liquidity is well covered. This is definitely a plus and shows they aren't over-leveraging with short-term debt. **Leverage** Interest Coverage Ratio: 26.73x Debt to Capital (using book liabilities as a proxy for market debt): 3.182% Verdict: Debt is easily serviceable and an incredibly small portion of overall financing. This and short-term liquidity suggest to me that the firm is very aware of its vulnerability to cyclical swings. **Overall Verdict:** Business risk is overall fairly low, and the firm is healthy. Valuation, however, is not supported by fundamentals, and there are signs of weakness in its ability to convert receivables into cash flows and the swings associated with inventory. The current market price, I think, is based purely on the speculative possibilities surrounding AI, which, while it could feasibly play out well, is not a true value investment.