Wall Street's love affair with semiconductors has turned its eyes towards Micron Technology (MU) after last week's investor day. The company forced analysts to sit up and take note. While many firms will talk about structural changes in their business or improving operational efficiencies, Micron management is putting their money where their mouth is.
The company announced a jaw-dropping $10 billion stock repurchase program kicking off in 2019. Furthermore, management has committed to returning 50% or more of free cash flow likely through an accelerated repurchase program. Some investors may prefer dividends, but Micron management seems to be indicating it feels its stock is significantly undervalued -- a funny notion considering the stock has added some $20 billion in market cap value since the start of May. Over the past year, the shares have more than doubled.
But a doubling of share price doesn't automatically mean a stock is overvalued. Micron has been commanding a better average selling price for its products. DRAM demand has been off the charts, especially in the cloud as companies race to store more and more data and access software application via data centers such as Amazon Web Services and Azure than using legacy systems.
Some concerns have emerged that China could influence DRAM pricing from rising too far too fast. That's akin to biting off your nose to spite your face. Chinese companies stand to benefit from the current trend. If anything, it is simply another chip, no pun intended, in the battle to save ZTE. NAND pricing is likely a greater command. Both DRAM and NAND are subject to peaks and troughs with both currently hitting peaks. It is not as simple as to say prices drop once they peak. They can remain elevated for some time. It's the same thesis that overbought can become more overbought.
I haven't even read anything of late regarding cryptocurrency and Micron. I suppose it is only convenient when prices are rising in names like bitcoin, but the fact is, Micron is still benefiting from mining. Price of things like bitcoin and ethereum will have some impact on overall computing demands, but demand will remain as I don't see mining going away any time soon. Given this doesn't get any mention these days, it is a potential headline catalyst for the future should crypto spike again.
Headlines are likely the biggest challenge for Micron moving forward. There are few analysts left to sing the company's praises. Big announcements are now in the eyes and minds of investors. What's left as a catalyst?
Earnings on June 20. Three weeks and Micron will have some lofty expectations to meet. The stock is pricing in a 12% move currently, and I think we'll see something close to it. At this point, I think we see a retest of $55 before we see $70.
Don't get me wrong, I like Micron, but I'd favor selling out-of-the-money puts or setting up ratio put spreads for a credit and look to get into the stock on a pullback. Buying today feels late to the game. In short, the risk versus reward has already encompassed a lot of known (aka missed) reward. A trader here ($64.25-$64.50) is basically playing earnings three weeks from now.
I might turn some love toward a smaller name such as Ichor Holdings (ICHR) and its $630 million market cap. If there is a name that can double from here, I'd bet on Ichor before Micron. Wall Street talks about how cheap Micron is, but take a look at ICHR and its single-digit forward P/E. The company's earnings last quarter just about equaled all of 2016. Its broadening customer base has it on pace for nearly $1 billion in revenue and $4 in earnings in 2018/2019.
While I wouldn't be shorting MU, I would be scoping out some opportunities in the semi space rather than chasing a bird already high in flight.