Shares of Micron Technology, one of the most prominent chip names, are up nearly 14% in 2021.
Management will release Q1 FY22 financials on December 20.
Long-term investors should consider buying dips in MU stocks, especially if they fall toward $83 or lower.
Investors in the memory chip maker Micron Technology (NASDAQ:) posted double-digit returns in 2021. Year-to-date, the MU share has risen almost 14%. In comparison, the has increased by 41.8%.
On April 12, MU shares hit an all-time high of just $97. But since that peak, they've fallen more than 11.5% and are trading at $85.66. The stock's 52-week range was $65.67 – $96.96, and its market capitalization (cap) is close to $96 billion.
In terms of global semiconductor revenue, Micron's 2020 market share was 4.7%. Meanwhile, according to recent statistics from the World Semiconductor Trade Statistics (WSTS), "The Worldwide Semiconductor Market is expected to grow by 25.6 percent in 2021 and to continue to grow by 8.8 percent in 2022."
Micron's fiscal year ends on September 2. The chip heavyweight released fourth quarter figures on September 28. It was $8.27 billion, compared to $6.06 billion a year ago. Non-GAAP diluted earnings per share (EPS) came in at $2.42 versus $1.08 in the fourth quarter of 2020.
About the results, CEO Sanjay Mehrotra said:
"In fiscal 2021, we established technology leadership on DRAM and NAND technology, achieved record sales in multiple markets and initiated a quarterly dividend. Demand outlook for 2022 is strong and Micron is delivering innovative solutions to our customers, enabling our long-term growth is stimulated.”
For its Q1 FY22 report on Monday, December 20, management expects revenues to be in the range of $7.65 billion ± $200 million. Diluted EPS is estimated to be in the $2.10 ± $0.10 range.
Before the release of the fourth quarter results, MU shares traded around $75. On Oct. 12, the stock hit an intraday low of $65.67 — the lowest level for stocks in a year.
However, the stock has since recovered and closed at $85.66 on Dec. 15. Among 36 analysts surveyed via Investing.com, Micron Technology's stock is rated “outperform”.
Chart: Investing.com
Analysts also have a median 12-month price target of $100.32 for the stock, representing an increase of more than 17% from current levels. The 12 month price range is currently between $58.00 and $172.00.
Similarly, according to a number of valuation models, such as those that consider P/E multiples or the 10-year Discounted Cash Flow (DCF) growth exit method, the average fair value for MU stock stands at $115, 02, implying an upside potential of over 34%.
In addition, we can determine the financial health of the company by ranking it on more than 100 factors relative to peers in the information technology sector. In terms of growth, cash flow and earnings health, Micron Technology scores 3 out of 5 (top score). Overall performance is ranked 4 ("great").
The latest P/E, P/B and P/S ratios for MU stocks are 16.4x, 2.2x and 3.5x respectively. In comparison, those stats for peers are 33.1x, 7.3x, and 8.3x.
Finally, readers looking at technical charts may be interested to know that several medium-term indicators of MU stocks are warning investors and providing overbought signals. However, the long-term bullish sentiment is intact.
Given the recent rise in price, our first expectation is that Micron Technology stocks will see gains in the near term that could take it below $85. Then MU could trade in a range, possibly between $80 and $85, establishing a new base. After that, a fresh start is likely to begin.
3 Possible trades on Micron Technology Stock
1. Buy MU Shares at Current Levels
Investors who are not concerned with daily price movements and who believe in the company's long-term potential should consider investing in Micron Technology stocks now.
On December 15, MU stock closed at $85.66. Buy-and-hold investors should expect to maintain this long position for several months, if not several quarters, as the stock attempts to hit the analysts' target of $100.32 . Such a step would lead to a return of more than 17% compared to the current level.
2. Buy an ETF with MU as a participation
Readers who don't want to put all of their capital into Micron Technology stocks, but still want exposure to the stock, may want to consider looking into a fund that the company holds as a holding company.
Examples of such ETFs include:
Invesco PHLX Semiconductor ETF (NASDAQ:): The fund is up 23.9% since its inception in June, and the weight of MU shares ' is 4.07%;
First Trust Nasdaq Semiconductor ETF (NASDAQ:): This fund is up 33.3% YTD and the weight of MU stocks is 4.03%;
iShares MSCI USA Value Factor ETF (NYSE:): Fund is up 21.8% YTD and MU stock weight is 3.70%;
Innovator Loup Frontier Tech ETF (NYSE:): The fund is up 6.7% YTD and the weight of MU stocks is 3.06%.
3. Cash-Secure Put Sale
Investors who believe MU stocks could continue to hit new highs in the coming weeks should consider selling a cash-backed put option in Micron Technology stocks – a strategy we employ regularly. Because it concerns options, this setup is not suitable for all investors.
Let's assume that an investor wants to buy Micron Technology stock, but does not want to pay the full price of $85.66 per share. Instead, the investor would prefer to buy the shares at a discount in the coming months.
One possibility would be to wait for MU stocks to fall, which may or may not be. The other option is to sell one contract of a cash-backed Micron Technology put option.
So the trader would normally write an at-the-money (ATM) or an out-of-the-money (OTM) put option while simultaneously setting aside enough money to buy 100 shares of the stock.
Let's assume the trader executes this trade until the option's expiration of February 18, 2022. Since the stock is $85.66, an OTM put option would have a strike of $82.50.
Thus, the seller would have to buy 100 shares of MU at the $82.50 strike if the buyer of the option were to exercise the option to allocate it to the seller.
The MU February 18, 2022 82.50 strike put option is currently offered at a price (or premium) of $4.60.
An option buyer would have to pay $4.60 X 100, or $460, in premium to the option seller. This premium amount belongs to the option seller, no matter what happens in the future. The put option ends on Friday, February 18.
The seller's max profit is this premium amount if MU shares close above the strike price of $82.50. If that happens, the option will expire worthless.
If the put option is 'in the money' (meaning the market price of Micron Technology stock is less than the strike price of $82.50) before or upon expiration on Feb. 18, this put option can be assigned. The seller would then be required to purchase 100 shares of MU stock at the put option's strike price of $82.50 (i.e., $8,250 in total).
The breakeven point for our example is the strike price ($82.50) minus the option premium received ($4.60), i.e. $77.90. This is the price at which the seller would lose money.
Cash-secured put selling is a fairly more conservative strategy than buying a company's stock at the current market price. This could be a way to take advantage of any slippage in Micron Technology stock in the coming weeks, especially around the earnings date.
Investors who end up owning MU shares as a result of selling puts may further consider setting up covered calls to increase the potential return on their shares. Thus, selling cash-backed puts could be considered the first step in owning stock.
