Micron: The Stock Trading At 14.7x P/E In 2025 Is A Buy (MU)

Investment Thesis

Micron’s (NASDAQ:MU) stock triggered a 7% pullback despite a better-than-expected Q3 FY2024 earnings result. Its Q4 FY2024 guidance also topped the market consensus. Given the strong rally this year, the post-earnings selloff might be driven by consolidation or concern about a significant increase in capex impacting its FCF in FY2025. Nevertheless, MU’s top-line growth trajectory has significantly reaccelerated since early this year, driven by price hikes and strong demand for high-margin AI-related products, including High Bandwidth Memory (HBM), high-capacity DIMMs, and data center SSDs.

In my previous article, I issued a sell rating, due to a 50% revenue decline amid premium valuation. However, over the past 12 months, there has been a tremendous shift in the growth story for NAND and DRAM. Due to the stock pullback, I upgraded MU to a buy, as the stock is now trading at 14.7x non-GAAP P/E FY2025 based on Bloomberg EPS consensus.

3Q FY2024 Takeaway

MU beat revenue estimates in Q3 FY2024, largely driven by 50% QoQ growth in its Storage Business Unit. However, investors might be disappointed that its Q4 FY2024 revenue guidance was only 0.26% above the estimate. Let’s look at the chart above. Despite a nearly 50% YoY revenue decline in FY2023, the company’s top-line growth has significantly reaccelerated since Q1 FY2024, accelerating over the past four quarters.

The midpoint of the Q4 FY2024 revenue guidance implies an 89.5% YoY growth, which is even higher than the previous quarter. I believe that the significant growth rebound justifies the recent price action and multiple expansions for the stock. Given the strong growth momentum, it’s possible that this selloff might imply that buyside consensus is even higher, and the muted 4Q revenue outlook might disappoint some investors as well. However, it’s clear that MU’s future growth trajectory will trend significantly higher due to AI-driven opportunities.

Now let’s look at the company’s margins. We can see that MU has significantly improved its gross margin, which is another positive signal. Typically, in the early stages, a growth company will prioritize top-line growth to maintain market share at the expense of margin expansion. While its non-GAAP gross margin is still below the 40% threshold that we’ve seen back in FY2022, it’s encouraging to see that a guided 34.5% non-GAAP gross margin in 4Q FY2024. I believe the gross margin will continue to expand towards previous highs in FY2025 due to price hikes on AI-related products.

With an expected 60.5% YoY revenue growth in FY2024 and significant margin expansion, we expect a massive rebound in earnings growth. The company not only beat non-GAAP EPS in Q3 FY2024 but also topped market consensus for Q4 FY2024. It’s also a positive sign that its non-GAAP EPS is in positive territory and poised to trend significantly higher in the coming quarters.

Wall Street Is Bullish on MU’s Growth Outlook

Although the management did not provide a FY2025 outlook, the street has significantly boosted its revenue and earnings revisions over the past few months. In the earnings call, the management indicated that the AI boom would drive significant growth in the demand for DRAM and NAND. They highlighted that the HBM3E solution boasts 30% lower power consumption than peers. Additionally, they also mentioned that HBM is sold out for 2024 and 2025, which will generate multiple billions of dollars in revenue in FY2025, up from several hundred million dollars in FY2024. With volume and pricing locked in for the next year, the street is bullish on the company’s growth outlook. Currently, sell-side analysts on Bloomberg expect average growth in its non-GAAP EPS for FY2025 to reach $9.04 per share, implying a 672.6% YoY growth. While the stock is currently trading at a lofty P/E TTM, I believe its P/E forward will significantly come down and look attractive if we factor in its FY2025 earnings consensus.

Growing Capex Will Impact FCF

The management indicates that MU’s FY2024 capex plan will be around $8 billion. We can estimate that Q4 FY2024 capex will be $2.7 billion, an 87% YoY boost compared to Q4 FY2023. Q4 capex is expected to be 36% of total revenue, up from 30.6% in Q3 FY2024. Management also expects to increase capex materially in FY2025, with capex around the mid-30% range of revenue. In the earnings call, they indicated that this would support HBM assembly and test equipment, fab and back-end facility construction, and technology transition investment to maintain demand growth. However, I believe the post-earnings selloff is partially driven by this announcement, as it will significantly impact FCF in the near term.

Valuation

As I mentioned in my last analysis, the stock was approaching an all-time high EV/Sales TTM back in June 2023, even as its revenue suffered from a 50% YoY decline. However, I mentioned that “when the stock price decreases, the valuation multiple becomes more expensive.” But we can expect MU’s growth outlook to be significantly higher in FY2025.

Despite an 88.3% expansion in its multiple from 4x in my previous coverage to 7.53x now, its EV/Sales FY2025E is expected to decrease to 4.26x, according to Seeking Alpha’s FY2025 revenue growth estimate of 50.75% YoY. Therefore, the stock is not trading at a lofty valuation.

In addition, if we factor in the Q4 FY2024 non-GAAP EPS guidance of $1.08, we can estimate the stock’s P/E FY2024 to be 113x, which is incredibly high. However, the company is expected to generate 672.6% YoY non-GAAP EPS growth in FY2025. This will make its non-GAAP P/E FY2025 to be 14.7x, significantly below the S&P 500’s P/E FY2025 of 19.6x. Therefore, I believe MU is currently undervalued and still has room for further upside. The last week’s selloff created a buying opportunity.

Conclusion

In summary, MU’s strong Q3 FY2024 earnings result, driven by substantial demand for NAND and DRAM and better-than-expected guidance for Q4, highlights its resilience and massive growth potential amidst the current AI boom. Despite a recent 7% stock pullback, likely due to consolidation and increased capex impacting near-term FCF, the company’s significant revenue and margin expansions signal a growth rebound story in the long run, which deserves a higher valuation. With non-GAAP EPS back in positive territory and expected to jump nearly sevenfold in FY2025, MU’s non-GAAP P/E FY2025 appears extremely undervalued and poised for further upside. Therefore, I upgraded the stock to buy.