The tech business, and in particular semi-conductors and memory, can be daunting for the average investor. If you are considering buying into one of the companies involved in that field and look for research, it sometimes feels that what is written is available only in a foreign language. Most articles written on the subject, presumably in an attempt to impress readers with the technical knowledge of the author, descend into an alphabet soup of DRAMs and NANDs and leave the reader feeling inadequate.
Now, I would not advocate investing in something that you don’t understand, but in order to buy stock in a company you don’t have to be an expert on every technical aspect of their business. It is usually enough to understand the dynamics of the market they are in, the demand for their products, their ability to supply that demand profitably, and their prospects of doing so. Factor in the price of the stock as well and you have what really matters to a potential investor... value.
On that basis, Micron Technology (MU) may be one of the best stocks to buy on this recent pullback. I have mentioned Micron in these pages before, the last time being at the end of February. Back then I pointed out that despite a 200 percent price increase from when I first talked about the stock, MU represented appealing value at around $24. Five months later it was trading above $34, so I guess that was a decent call.
It would be reasonable to expect that run up to reduce the value in the stock, but, if anything, given developments in the semi-conductor and memory markets since, Micron may well be even better value now than it was then.
The last few weeks have seen the stock pull back around 11 percent from that high. Part of that is due to general market weakness, but part of it is more specific to Micron’s market. At the end of last month, electronics giant Samsung announced plans to step up production of the most widely used memory, Dynamic Random Access Memory (DRAM). Global demand, and therefore prices, for that product has exploded as it is used extensively in mobile devices and Samsung’s inability to produce enough for even their own use had led to them buying from Micron.
Obviously, Samsung’s decision looks, on the surface, to be bad news for Micron, but in the context of a market that has been experiencing shortages for some time, it may not be as bad as some seem to think. Micron has, as this Summit Research report states, been struggling to keep up with demand as it is. With Apple (AAPL) set to launch the iPhone 6 and the possibility that it will use a new generation of memory in which Micron is an industry leader, it looks likely that Samsung’s decision won’t change that situation too much. Strong demand and pricing that reflects that are set to continue.
This rapid rise in demand and price came as no surprise to Micron; they anticipated it back in 2012 when they announced plans to acquire the struggling Elpida, a move which looks very smart now. It does, however, seem to have surprised the market. Valuations have struggled to keep up with the turnaround in the business. Consequently MU, despite more than doubling in the last year, is still trading at a significant discount to the market.
Micron’s forward P/E is below 9, which is certainly cheap on a relative basis, and in case you think that is the product of inflated expectations you should bear in mind that that represents only 12.5 times trailing earnings. You don’t have to be an expert on the technology behind a company’s products to understand that those numbers mean that MU is cheap and that the recent weakness is just a buying opportunity.