Semiconductor stocks are notoriously volatile, and becoming accustomed to the frequent up-and-down sales cycles -- a norm for all businesses related to manufacturing -- is a must. Memory chip maker Micron Technology (MU +3.03%) is no exception.
In fact, past sales-cycle slumps have left Micron operating in a sea of red ink and have led to poor returns on invested capital (the money a company puts to work for research, optimizing its operations, etc.). And while the current slump that started to crop up in late 2018 may last longer than expected thanks to the outbreak of COVID-19, the company is in decidedly better shape than ever before.
Walking away from low-profit deals
Micron's big year-over-year revenue declines from all-time highs and fast-evaporating profits are well documented; but even with sales having reached or nearing some sort of cyclical bottom, Micron remains in the black. And profit metrics aren't simply holding on by a thread. While operating profits totaling well into double-digits as a percentage of the top-line are gone for now, Micron is faring pretty well, especially considering its past performance during downturns.
Data by YCharts.
It would be easy to simply pin this on the sheer number of end uses for memory chips these days, including smartphones and other consumer electronics, cars, and data centers (and the cloud computing services they support). That is certainly part of the equation. But there's more to the story. In recent years, Micron has been walking away from less profitable deals, and its leadership in newer memory technology -- like NAND flash chips and its 3D XPoint memory architecture co-developed with Intel -- gives it the ability to confidently walk away and focus on sales that actually pay the bills.
The company has also used previous booms to streamline operations and clean up the balance sheet. In fact, as of the end of February 2020, total debt had been reduced to $5.19 billion (compared with $9.87 billion in debt at the end of its 2017 fiscal year), but with near record-high $7.12 billion in cash and equivalents.
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Long-term demand still on the rise
Thus, while thinking "this time is different" is often investing folly, this time really does look different for Micron. The 2020 outlook could certainly deteriorate fast due to the coronavirus-induced recession that is sure to come (and to be safe, the strong possibility should be factored for), but the long-term potential is still there. The world is going digital, and perhaps faster than ever before due to the outbreak of the pandemic. Cloud computing, mobility, and digital systems are in high demand and expected to continue growing for the foreseeable future. While Micron will certainly remain subject to volatile price swings in memory chips as demand ebbs and flows, the secular trend toward digital at least provides a floor going forward.
But is the stock a buy? Shares are valued at 22.9 times trailing one-year earnings per share, a figure that has been pushed higher in recent quarters as earnings dry up during the sales drought. And with the outlook for the immediate future uncertain, Micron isn't exactly cheap.
Nevertheless, the best time to buy cyclical stocks like Micron (or any other stock for that matter) is during a downturn, not when optimism is riding high. At least at the time of this writing, pricing on most memory chips has stabilized and is beginning to show signs of rising -- although chip pricing could still face disruption as the full impact of coronavirus becomes known. For investors who think chip demand will keep growing over the long term, buying small amounts of Micron stock while in the midst of the down cycle and then paring back purchases during uptrends (or taking profits) is usually the best course of action. And for those who don't want to babysit, this stock is a pass.
But in due course, the beat-up memory chip industry will rally. This year may not be the one where that happens, but Micron is nevertheless in better shape than ever before and is well-positioned to capitalize once the good times return.
