Micron Stock Price Forecast August 2021 – Time to Buy MU?

Micron (MU) stock rose almost 3% yesterday. The chipmaker has now recouped its 2021 losses and is trading almost flat for the year.

However, the stock is underperforming the markets by a wide margin. Both the S&P 500 and Nasdaq are up in double digits in 2021 and are near their record highs. What’s the forecast for MU stock after its 2021 underperformance and should you buy it now?

Micron stock recent developments

Micron stock went up yesterday after Wall Street Journal reported that Western Digital is in advance merger talks with Kioxia Holdings. Kioxia is a privately held Japanese company that makes NAND chips. In March, the Journal had also reported that Micron is in talks to merge with Kioxia.

Earlier this month, Micron had also initiated a dividend and announced a quarterly dividend of 10 cents per share. “Initiating a common stock dividend reflects our confidence in Micron’s future and our commitment to creating compelling value for shareholders,” said Micron CEO Sanjay Mehrotra. The payout will imply a forward annualized yield of only about 0.54% which is only about one-third of the S&P 500’s dividend yield. Also, other chipmakers have a much higher dividend yield. Intel, for instance, has a dividend yield of 2.56%.

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MU reported an earnings beat

Micron’s fiscal third-quarter 2021 earnings managed to beat estimates for both the topline as well as bottomline. Micron posted a non-GAAP net income of $1.74 billion in the quarter which implies an adjusted EPS of $1.52. “Micron set multiple market and product revenue records in our third quarter and achieved the largest sequential earnings improvement in our history,” said Mehrotra. However, the stock had closed lower despite the earnings beat.

Global chip shortage

Micron produces both NAND and DRAM but the latter accounts for the bulk of its revenues. The company expects DRAM bit demand to be above 21% in 2021 while it forecasted a NAND bit demand growth in the mid-30s.

Notably, there has been a severe chip shortage over the last couple of quarters and MU expects the shortage to continue into 2022 also. While several industries have been negatively impacted by the chip shortage, the global automotive industry is the worst affected. Leading automakers including Toyota Motors, General Motors, and Ford have had to curtail production amid chip shortages.

Micron stock price forecast

While Micron stock has underperformed the markets by a wide margin this year, Wall Street analysts see better days ahead for the chipmaker. Its median target price of $115 is a premium of 55.3% above current prices. The stock trades even 1.3% below its street low target price of $75 while the street high target price of $172 is a premium of 132.3% over current prices.

Of the 33 analysts polled by CNN Business, 28 have rated MU stock as a buy while the remaining five have rated it as a hold or some equivalent. None of the analysts has a sell rating on Micron stock.

Recent analyst action

Earlier this month, Morgan Stanley had downgraded Micron stock from overweight to equal weight expressing concern over the slowing memory demand. “While we have been impressed by the structural improvements at the company, and we see limited downside, we see the stock as effectively rangebound in an environment where DRAM prices start to decline,” it said in its note.

However, not all seem to agree. Earlier this month only, Rosenblatt reiterated Micron stock as a buy after the company initiated its dividend. “Micron is changing its share repurchase tactics to be cross-cyclical than yearly, to opportunistically be aggressive when shares are below their intrinsic value; as management believes is the case for the current August quarter. MU remains our top Mother of All Cycles (MOAC) ‘cycle’ pick,” the brokerage said in its note.

Micron stock price valuation

Micron stock looks very attractive from a valuation perspective. It currently trades at an NTM (next-12 months) PE multiple of around 7x. The multiple has averaged 13.1x and 12.2x over the last three year and five-year period respectively. To be sure, since the chip industry is cyclical in nature, the valuations multiples tend to bottom near the cyclical peaks. However, we are in a chip supercycle that is being led by digital transformation. Also, the gadgets are getting smarter which means more chips per gadget.

The current valuation discount for MU stock over the long-term averages looks unwarranted and the stock should see an expansion of trading multiples.

MU stock price technical analysis

Micron stock is not looking very bullish on the charts though. The stock is trading below its 50-day, 100-day, and 200-day SMA (simple moving average) which is a bearish sign. Earlier this month, there was a “death cross” formation in the stock after its 50-day SMA fell below the 200-day SMA. While the death cross is a lagging indicator, it indicates a long-term bearishness in the stock.

The MACD (moving average convergence divergence) also gives a sell signal for MU stock while its 14-day RSI (relative strength index) of 47.8 is a neutral indicator.

That said Micron is among the companies that are an ancillary play on the digital transformation. The stock’s valuation multiples look very attractive even as software and tech companies that are benefiting from the digital transformation are trading at elevated valuations. Micron stock should see a valuation rerating as markets acknowledge its strong fundamentals.

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