Can This Chip Stock Take on NVIDIA?

With a market capitalization of $310.4 billion, NVIDIA Corporation (NVDA) provides graphics, computing, and networking solutions. The company is well known for its GPUs.

The company faced a significant decline in its graphics segment business, which led to a fall in revenue and gross margins in the last reported quarter. Falling demand for GPUs and pricing power led to the segment reporting a 44% sequential drop.

NVDA provided weaker-than-expected guidance for the third quarter of fiscal 2023. It expects revenues of $5.90 billion (plus or minus $118 million), which means a nearly 12% sequential decrease.

On the other hand, chip maker Micron Technology, Inc. (MU) designs, manufactures and sells storage products globally. It operates through the Compute and Networking Business Unit, Mobile Business Unit, Storage Business Unit, and Embedded Business Unit.

MU offers DRAM products, dynamic random access memory semiconductor devices that provide high-speed data retrieval. The devices are used widely in data centers, personal computers, and other devices.

Earlier this month, MU broke ground for a $15 billion factory in Boise, Idaho. This is the first new memory manufacturing fab built in the U.S. in two decades. The company also announced another plant to be made in the U.S. Once operational; the U.S. plants are expected to account for 40% of MU’s DRAM production volume globally, up from 10% currently.

Although MU surpassed the consensus EPS estimate by 6% in the last quarter, it marginally missed analysts’ revenue estimates.

On June 30, 2022, MU’s President and CEO said, “Recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth in fiscal 2023.” “We are confident about the long-term secular demand for memory and storage and are well positioned to deliver strong cross-cycle financial performance.”

MU’s stock has declined 46.2% in price year-to-date and 32.3% over the past year to close the last trading session at $50.10.

Here’s what could influence MU’s performance in the upcoming months:

Robust Financials

For the fiscal third quarter that ended June 2, 2022, MU’s revenue increased 16.4% year-over-year to $8.64 billion. The company’s non-GAAP operating income increased 33% year-over-year to $3.14 billion. Its non-GAAP net income and non-GAAP EPS rose 35.3% and 37.8% from the prior-year period to $2.94 billion and $2.59.

Mixed Analyst Estimates

Analysts expect MU’s EPS and revenue for fiscal 2022 to increase 36.8% and 11.6% year-over-year to $8.29 and $30.91 billion, respectively. Its EPS and revenue for fiscal 2023 are expected to decline 42.4% and 15.3% year-over-year to $4.77 and $26.19 billion, respectively.

Discounted Valuation

In terms of forward non-GAAP P/E, MU’s 6.04x is 64.1% lower than the 16.85x industry average. Its trailing-12-month EV/EBITDA of 3.01x is 74.1% lower than the 11.64x industry average. Also, the stock's 1.79x trailing-12-month P/S is 27.2% lower than the 2.46x industry average.

High Profitability

In terms of trailing-12-month net income margin, MU’s 30.61% is significantly higher than the 4.18% industry average. Likewise, its 55.67% trailing-12-month EBITDA margin is 348.4% higher than the industry average of 12.42%. Furthermore, the stock’s 34.51% trailing-12-month EBIT margin is 385.2% higher than the industry average of 7.11%.

POWR Ratings Reflect Uncertainty

MU has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. MU has an A grade for Value, in sync with their discounted valuation. The stock has a B grade for Quality, consistent with its high profitability. It has a 1.30 beta justifying its D grade for Stability.

MU is ranked #38 out of 93 stocks in the B-rated Semiconductor & Wireless Chip industry. Click here to access MU’s ratings for Growth, Momentum, and Sentiment.

Bottom Line

MU expects the demand for memory chips from the data center end market to remain strong, driven by cloud adoption and digital transformation by organizations. Whereas NVDA has provided weak guidance for the near term, its revenue is expected to take a hit because of the export ban on two of its most advanced AI chips to China.

MU has strong financials, discounted valuation, and higher-than-industry profitability. While MU is better positioned than NVDA, it could be wise to wait for a better entry point in the stock considering its poor stability and mixed analyst sentiment.

How Does Micron Technology, Inc. (MU) Stack Up Against its Peers?

While MU has an overall POWR Rating of C, you might want to consider investing in the following Semiconductor & Wireless Chip stocks with an A (Strong Buy) and B (Buy) rating: STMicroelectronics N.V. (STM), Advantest Corporation (ATEYY), and United Microelectronics Corporation (UMC).

MU shares were trading at $49.82 per share on Monday morning, down $0.28 (-0.56%). Year-to-date, MU has declined -46.34%, versus a -21.75% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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