Friends,
Tell me if you'd be interested in this stock:
- It is expected to grow revenue by over 150% in the next 12 months.
- Gross margins sit at 85%, while operating margins clock in at 80%.
- It is currently trading for just 7 times forward earnings, and 10 times forward free cash flow.
In our investing lives, deals like this don't come around every day.
The Curious Case of Micron Technology
For the longest time, we didn't even pay attention to tech suppliers' stocks. SanDisk, Micron, and Western Digital -- to name a few stateside players -- were simply too cyclical. When times were good, they were good. But when times were bad, they were really, really bad.
Let's take 2022 as a textbook example: over the course of the year, Micron's stock lost ~50% of its value. But that actually seems tame when you consider that gross margins plunged to negative territory for more than a year.
Think about that: because Micron raised capacity in a commoditized market, and the cycle turned, the company was losing $0.33 for every $1.00 in sales -- and that doesn't even include the research and marketing budgets!
But that was then, and this is now. The AI and data center boom has left hyperscalers scrambling to secure access to high-bandwidth memory (HBM) chips. There are only a handful of players that make such chips -- which leaves Micron firmly in the driver's seat.
Is it different this time?
It's not easy to just manufacture more chips. The technology behind the scenes takes years to build and decades to perfect. So the shortage we're experiencing now could last for quite a while.
But the reason the stock trades for such tiny multiples is that investors have scar tissue. They remember 2022 (and 2018, when shares fell by 54%, and 2015/16, when they fell by over 70%).
However, Micron management came out of earnings with a new weapon that could change everything: strategic customer agreements (SCAs) that can guarantee minimum prices and volumes from customers for years into the future. The goal is simple but has never really existed in the industry before -- create conditions that insulate Micron from boom and bust cycles.
Will it work? It's something that we're paying close attention to right now.
But while our thinking about Micron specifically could evolve over time, one thing remains certain: we believe that moats matter most for long-term dominance in the stock market. If Micron can introduce a wrinkle to its business model that creates just such a moat, that's not a change in our belief system; it's a change in how the company does business.
No matter what conclusion we come to, we're very curious to see how it plays out.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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