Micron Stock Valuation: Why Cheap Earnings Can Be Misleading

During their recent episode of the Acquirers Podcast, Travis and Carlisle discussed Micron Stock Valuation: Why Cheap Earnings Can Be Misleading. Here’s an excerpt from the episode:

[Tim] Oh yeah. I mean, it’s, it’s, I mean, you look at like Micron for instance. So like you said, I mean, so earnings are growing very rapidly.

I mean, this is a period of extreme earnings growth, but then you also have the dichotomy where free cash flows are down. So you have, I think the hyperscalers are spending like $600 billion. And I think that the deflate, depreciation, oh my gosh, it’s been a long day.

The depreciation might be like one fifth or one sixth of that. So, so it, they’re not taking nearly as big of a hit to earnings as, as they are to, to free cashflow. And so what ultimately will matter is what’s the ROI, you know, on that CapEx.

And I know Michael Burry had his thoughts on depreciation of the GPUs and whatnot. But like Micron’s kind of an interesting company because you have a, it’s an oligopoly. There’s, you know, two or three major suppliers.

So that reduced competition really changed the dynamics of the business. And the margins are just insane. I mean, they’re, they’re, they’re sold out for, I think like two years.

And, but then you have like the headlines, well, China is starting to get into that game and why wouldn’t they, right? Like, I mean, why wouldn’t they, if you’re China?

[Tobias] It’s capitalism, baby.

[Tim] I mean, I mean, it’s something, you know, it’s government, government sponsored capitalism, right? And, and so, I mean, that, that could have a huge, huge impact. I mean, nobody wants to be paying these prices for, for those memory and it’s impacting everything.

It’s impacting iPhone sales and, and all of these different areas. And, and I understand Micron’s, I mean, I’m looking at right now, it’s trading at 5.41 forward earnings. It’s very cheap.

If you, you know, believe the earnings are sustainable.

[Tobias] Yeah. You’ve got to normalise those earnings. I mean, they’ve been traditionally, they’ve been very cyclical.

Micron’s been one of those companies that pops into the deep value screens all the time because the earnings are so high relative to a low market valuation because folks know that they’re cyclical and they, they go up and down. We may be in a brand new world where they’re no longer cyclical. I don’t know.

Maybe the demand is, is out so far that they’re secular for a while. Maybe they’re still cyclical. I have, I really have no idea whether the nature of that business has changed.

[Tim] I think that, I think, I don’t think that nature has changed that much. I mean, it’s just how long the cycle goes. But one thought that I have that’s interesting is, okay, I love Claude.

I love it. It’s fantastic. It’s a fantastic product.

And I don’t use ChatGPT that much, but I’ve heard really good things. I’m sure it’s fine. But you have like the advent of Muse and Muse, I mean, for business guys or girls, like Claude, I think obviously takes the cake over something like Muse.

But I do think if you, if you have so many options for, for, you know, these AI products, I mean, what, what is the pricing power of the business? I mean, it just seems like they can really, it just, you’re spending so much money. You need profitability to, to justify that at some point, because you’re just spending, you know, equity and, and, and debt as well.

So it’s, it’s just interesting if you get, I think Steve Eisman’s kind of made this point. If, if you got people losing confidence in open AI and, and anthrop, anthrop, anthropic, I always want to say anthropology and anthropic, then, then those future orders, like, you know, Oracle’s massive order book, and a lot of these companies have massive order books might come into question a little bit. So, you know, those are a few of the things, but ultimately, like, I think the hyperscalers are, are still decent values.

I thought Meta was dirt cheap for a while. And I mean, I like my Mark Zuckerberg strategy on, on, on Muse and how he’s putting it out there. I mean, what a home run.

And it seems like it’s going to keep getting better.