Over the last year and a half, Micron (NASDAQ:MU) stock has been one of the tech industry’s best success stories. Share prices jumped over 87% in 2017 alone, and this progress persisted into 2018 with 29.5% year to date returns. However, MU has recently run into a block in the road; the stock has hovered within the $50-$62 range, repeatedly failing to reach its 52-week high of $64.66.
As this ebb and flow has lingered for more than half of 2018, analysts have begun wondering whether the tech leader actually has a chance to achieve its ambitious price target. Blogger Khaveen Jeyaratnam, one of many skeptics of the consensus, decided to take matters into his own hands to predict Micron’s future share price. Jeyaratnam used Micron’s free cash flows to value the firm over a five-year time horizon, acknowledging factors such as forecast period, terminal value, and discount rate.
Jeyaratnam started off by attacking the forecast period, which projects future financials for the next five years. The blogger assumed decreasing revenue growth rates for upcoming years of 3.5%, 2.8%, and 2.5%, with the exception of the final year, which exhibits a positive growth rate of 2%. Jeyaratnam also takes into consideration the predicted $4 billion in debt repayments and the $10 billion in share repurchases, both of which are highlighted by the company’s guidance. Gross margins of 58% are based on current 1Q-3Q18 figures and are held constant for future years.
The next variables the blogger solved for were terminal value and discount rate. Terminal value, which adds together all future cash flows and accounts for any changes in value, was calculated by averaging perpetual growth with EV/EBITDA. The 2% perpetual growth rate indicated a terminal value of 114,388, while Micron’s 6.9x EV/EBITDA indicated worth of 141,438. Together, these figures mark an average terminal value of 127,913. Jeyaratnam followed up by deriving MU’s 8.8% projected discount rate from the 2.87% 10-year U.S. Treasury risk free rate and the 4.4% equity risk premium, among other factors such as cost of equity and yield on debt.
With forecast period, terminal value, and discount rate all computed, the blogger was finally able to determine intrinsic value. After adding cash flow to and subtracting debts from the calculated enterprise value, Jeyaratnam’s model estimated a share value of $97.85, which implies over 100% upside from current levels.
Despite using conservative projections for all necessary discounted cash flow statistics, the share value nevertheless exceeded that of nearly all forecasts. When looking at potential reasons, the blogger could only attribute the price difference to either higher capital expenditures, lower depreciation expenses, or adjusted costs of capital for future years.
All in all, though, Jeyaratnam sees his predictions as reasonable and remains confident with his calculated price target of $97.85: “Despite the volatility, technical analysis indicates a strong uptrend for Micron’s share price with strong support levels at the current price. The company also is relatively undervalued among their peers. Overall, bearing short-term price fluctuations, this is an amazing value stock to hold and is currently trading at a significant discount.”
The Street shares Jeyaratnam’s upbeat take on Micron. This “Strong Buy” stock has received 19 recent bullish calls from the Street vs just 4 hold ratings. Given MU is currently trading at $47.84, the average analyst price target indicates 73% upside potential. You can click on the screenshot for further insights into the latest market activity on MU.
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