Despite shedding about 3% of its stock price over the past couple of days, chip and memory manufacturer Micron Technology (NASDAQ: MU) is still enjoying a 20% jump in value since announcing fiscal 2015 Q4 and year-end earnings Oct. 1. That's a hefty pop regardless of industry, but is especially impressive given Micron Technology's reliance on the declining PC market, a trend that's left even the biggest of chip makers scrambling.
This pop would lead an investor to believe its recently completed Q4 must have been a home run to garner so much good will. The thing is, if there were any surprises from Micron Technology's fiscal year it was how poorly it performed -- and based on estimates for its current quarter, investors can expect more of the same.
A tough year rewarded
On an annual basis, Micron Technology sales were relatively flat, only dropping to $16.2 billion from fiscal 2014's $16.36 billion. Given the aforementioned rough PC market, fiscal 2015 wasn't that bad, and would explain investor optimism if it told the whole story. Unfortunately, there's more to Micron Technology's fiscal 2015 than its annual revenue.
A closer look at Micron Technology's quarterly results paints another, less attractive story. The $3.6 billion in sales recorded in fiscal Q4 was a 15% drop from the same period last year, and continued a disturbing trend of declining quarterly revenue. While Micron Technology CEO Mark Durcan and team were able to curb spending a tad, it was nowhere near enough to overcome sluggish sales.
On a non-GAAP basis (excluding one-time items), earnings-per-share (EPS) dropped like a log to $0.37 from the year-ago period's $0.54, a 31% decline. Granted, fiscal 2014's Q4 included a couple of positive, one-time adjustments that boosted last year's results; these skew comparisons somewhat, but not that much.
Now toss in precipitous declines in operating income and gross margins and a balance sheet that has approximately $1 billion less in cash and equivalents than this time last year, and it gets even harder to see what all the fuss was about to drive Micron Technology's stock up at all, let alone over 20% in Oct. Finally, in conjunction with Micron Technology's weakening cash position, it's also carrying 28% more long-term debt than in 2014, up to $6.25 billion from last year's $4.9 billion.
But what a value?
Micron Technology fans may point to its relative value as the reason behind its stellar share price run, and there's something to be said for that -- at first glance. Trading at just six times trailing earnings -- about half the multiple of Micron Technology's big brother, chip king Intel (NASDAQ: INTC) -- it would appear to be an absolute steal.
A look at Micron Technology's relative value going forward, however, paints a different picture. Yes, it's trading at six times earnings today, but based on its existing share price Micron Technology stock is valued at nearly eight times projected earnings. In other words, Micron Technology will become more expensive going forward thanks to declining earnings, and that's a big red flag for prospective investors.
Intel, on the other hand, is trading at nearly an identical multiple -- 13 and change -- looking backward and forward. PC-reliant Intel also differs from Micron Technology in that it's been able to stem some of the revenue tide by focusing on burgeoning markets like cloud-centric data centers. Once again, Intel enjoyed a double-digit jump in data center revenue last quarter, climbing 10% to nearly $4 billion. Add Intel's 3% dividend yield to its results in high-growth markets, and, comparatively, Micron Technology doesn't stack up.
That said, to Micron Technology's credit, its recently announced deal with Intel to develop new memory solutions is a step in the right direction. The new 3D XPoint technology will enhance memory speeds by as much as 1,000 times compared to Micron Technology's current bread-and-butter, its flash memory products, which will become necessary as the world shifts to all things digital.
But the new memory market is rife with competition, with some of the industry's heaviest hitters already chasing the same, speedy solution. The bottom line is this: Micron Technology is cheap by traditional standards for a reason. Consistent quarterly revenue and EPS declines and expectations for more of the same, coupled with a share price that appears to be running on momentum alone, are all warning signs to avoid the Micron Technology hype.
