Micron is one of the market’s most undervalued opportunities according to David Tepper of Appaloosa Management.
Speaking at the JP Morgan Robin Hood Conference last week, Tepper proclaimed that Micron is currently trading at its lowest multiple ever recorded, but the outlook for the business has never been better.
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David Tepper Robin Hood Pick
Micron is 12% of Tepper’s equity exposure (Chinese internet names (BABA/Tencent) are 2nd biggest equity position according to the speech). The stock is trading at a forward (2018) P/E of 3.8 according to Appaloosa’s analysis (5.7x according to consensus), which is below the industry average of 8x for memory companies and 15x for memory equipment companies.
However, despite the low valuation, the industry dynamics have never been better. Capital intensity has increased barriers to new supply with 1% of volume growth now costing an estimated $600 million. At the same time, supply is set to spike over the next few years. DRAM demand is projected to grow at a CAGR of 34% over 2016 to 2026. The auto DRAM market is expected to see the most significant growth at 64% CAGR followed by server and cloud demand at 49% CAGR.
Historically, Tepper has hated Micron due to the semiconductor industry’s poor economics, but the industry now has an oligopolistic nature, which has pushed margins higher. This support could help drive earnings per share to $11 or $12 in the best case according to Appaloosa’s analysis.
Lastly, Micron’s new CEO is from Sandisk. This outside influence, coupled with improving market fundamentals, should help the company pull itself out of the rut its been stuck in for the past few years.
Tepper isn’t the only fund manager that likes the look of Micron. The company has been highlighted multiple times by fund managers profiled in ValueWalk’s exclusive hedge fund newsletter.
In our latest issue, Eric Gomberg of Dane Capital had the following to say about the opportunity:
“What has been most fascinating, and something we’ve not seen discussed at length (and in fairness, we don’t read a ton of sell-side research) is that in the current sales process of Toshiba’s memory unit, Apple particularly (and seemingly in a real way), and to a lesser extent Amazon and Google, have come up as potential members of a consortia to acquire Toshiba’s flash business. To us, that’s crazy and represents a complete transformation in the view of memory by OEMs. For decades, memory has been the disrespected ugly stepchild of semiconductors. It has been viewed as a commodity product where large OEMs hold leverage and can drive pricing. In our firm’s view, that Apple is even in the conversation as a potential buyer reflects that there is genuine worry that there will be capacity constraints in memory if not in 2018 than in 2019 or 2020 or beyond.
The cost of semiconductor fabs continues to grow. The incremental benefit of die shrinks continues to diminish. The use cases of memory continue to diversify. Again, we understand that Micron is well covered, but it is also a security in which we have a 20-year history in the space and perspective that we think is differentiated from many in the covering the company. Not to mention, at 6x earnings, we’re certainly in line with the Dane model of owning cheap stocks. If we’re right, there’s a tremendous potential for a positive multiple re-rating.
In another issue, Barry Pasikov of Hazelton Capital Partners also picked Micron as a potentially undervalued investment:
“Over the past year, Micron Technology’s share price has rallied over 100%. Both DRAM and NAND prices maintained their healthy upward momentum which has lead to EPS expectation around $4.60 for 2017 and $6.25 for 2018. At $34/share, Micron is trading just below 7.5x and 5.5x 2017 and 2018 expected earnings respectively — a true indication that the market does not believe that the current DRAM and NAND average selling price is sustainable.
In the past, the digital memory and storage industry has been a victim of rapid technological change and competition amongst its members, preventing companies from achieving a meaningful return on their invested capital. Today, with 3 major players in DRAM and 5 in NAND, market share is driven by demand and production capacity and not by achieving market share, as industry pricing has become more “rational.” That is not to say that cyclicality will not play a role, but as demand for digital memory and storage expands from an increasingly connected data ecosystem, including the cloud, storage servers, mobile devices and now the burgeoning IoT (internet of things), I expect the duration of the cycle to be both longer and with a more muted peak to trough pricing leading to a stronger and more sustainable average selling price.”
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