The market could be too impatient with Micron Technology, Inc. (NASDAQ: MU)

This article first appeared on Simply Wall St News.

As fears of falling memory chip prices begin to materialize, the latest collapse at Micron Technology (NASDAQ: MU) completely wiped out annual gains.

While short-term headwinds should not be a reason for “panic selling,” potential buyers should carefully weigh the pros and cons of their investment period.

Check out our latest review for Micron Technology

Following last month’s predictions of oversupply of memory chips, TrendForce’s latest survey predicts a noticeable gap between supply and demand in 2022.

<span> <span>  DRAM Market Forecast Source: TrendForce </span> </span>“src =” “data-src =” https://s.yimg.com/ny/api/res/1.2/JCOcR_bCjG5ZIO654bnFCQ–/YXBwaWQ9aGlnaGxhbmRlcjt3PTk2MDtoPTQ4MA–/https://s.yimapi/u/u res / 1.2 / XO5QtwUlysh09myZgmq2zg– ~ B / aD0zMDA7dz02MDA7YXBwaWQ9eXRhY2h5b24- / https: //media.zenfs.com/en/simply_wall_st__316/43d554c5f782b8a9a74><noscript><img alt= DRAM Market Forecast Source: TrendForce “src =” https://s.yimg.com/ny/api/res/1.2/JCOcR_bCjG5ZIO654bnFCQ–/YXBwaWQ9aGlnaGxhbmRlcjt3PTk2MDtoPTQ4MA–/https://s.yimg.com/uu/gUshO2Q9t/1.2 – ~ B / aD0zMDA7dz02MDA7YXBwaWQ9eXRhY2h5b24- / https: //media.zenfs.com/en/simply_wall_st__316/43d554c5f78b4a0beef11d1a974a2758 “class =” caas-img “/>

DRAM Market Forecast Source: TrendForce

Naturally, this is attracting caution from analysts, as shown by the view of Bank of America, which issued a neutral rating on the stock. While the average price target is above $ 100, BofA has issued a target of $ 76.

Their analyst Vivek Arya praised the management and improvement of free cash flow but warned of the impact of supply shortages of non-memory components creating imbalances in the market and putting pressure on margins.

Still, CEO Sanjay Mehrotra remains bullish as he sees the market recovering in the second half of 2022, forecasting “record revenues with solid profitability for fiscal 2022.” For a company, that would mean going over $ 30.39 billion. 2018 earnings dollars. While optimistic, it’s important to note that Mr. Mehrotra is aiming for record earnings, not profitability.

How profitable is Micron technology?

ROE or return on equity is a valuable tool to assess how effectively a company can generate the returns on investment it receives from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

How is the ROE calculated?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, Micron Technology’s ROE is:

13% = US $ 5.9B ÷ US $ 44B (Based on the last twelve months to September 2021).

The “return” is the amount earned after tax over the past twelve months. This means that for every dollar in shareholders’ equity, the company generated $ 0.13 in profit.

The relationship between ROE and profit growth

Based on the portion of its profits that the company chooses to reinvest or “keep”, we can assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of the business compared to businesses that don’t necessarily have these characteristics.

Micron Technology profit growth and 13% ROE

Micron Technology’s ROE appears acceptable, as the The industry average ROE is similar to 15%. Given the circumstances, we can’t help but wonder why Micron Technology has seen little or no growth over the past five years. We believe there might be other factors at play here that are limiting the growth of the business. These include low profit retention or poor capital allocation.

When you compare Micron Technology’s net income growth with the industry, you can see that the company’s growth figure is lower than the industry’s average growth rate of 17% over the same period, this which is a bit disturbing.

past profit growth

Profit growth is an important metric to consider when valuing a stock. Investors then need to consider whether the expected earnings growth, or lack thereof, is already built into the stock price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them.

Has the market taken into account MU’s future prospects? You can find out in our latest Intrinsic Value infographic research report.

Is Micron Technology effectively reinvesting its profits?

Micron Technology’s low three-year median payout rate of 1.9% (meaning the company keeps 98% of the profits) should mean it keeps most of its profits and, therefore, should experience a growth greater than that announced.

After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to increase to 3.3% over the next three years. However, Micron Technology’s future ROE is expected to increase to 19% despite the anticipated increase in the company’s payout ratio. We infer that other factors could be behind the anticipated growth in the company’s ROE.

Summary

Despite the imbalances between supply and demand, it seems that the market is overreacting in the short term. The current price-to-earnings ratio is around 13x, the price-to-earnings growth ratio is 0.7, while the price-to-book ratio is 1.7x, well below the industry average 4 , 4x.

Still, the low profit growth is a bit of a concern, especially since the company has a high rate of return and reinvests a considerable portion of its profits. At first glance, there could be other factors, which do not necessarily control the business, which are preventing growth. But, on a positive note, the latest forecasts from industry analysts show that the company’s profits are expected to pick up.

To learn more about the company’s future earnings growth forecast, check out this free analyst forecast report for more information.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St do not have positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material.

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