Historically, companies like
That makes digital storage, it was a poor investment. So let me tell you why, at a time when tech stocks are fluctuating almost unprecedentedly, you should now buy both.
The drive business has always been characterized by boom and bust cycles. Demand soared, usually due to a sharp rise in PC sales, driving up prices. This motivated players to enhance abilities beyond all rational levels. Excessive capacity may lead to lower prices, and bankruptcy. The hard drive industry that once had hundreds of gamers has been reduced to three, and only two –
(Stock ticker: STX) and Western Digital (WDC) – They control the vast majority of sales.
There has also been a merger of the memory chip business – or, indeed, companies. There are chips called DRAM, or dynamic random access memory, that store data temporarily in computers, servers, and smartphones. And there’s flash memory, or NAND, which is numeric logic talking about “NOT AND”. NAND is used in solid-state drives, memory cards, and USB memory sticks, as well as in personal computers, servers, and smartphones. DRAM is dominated by Micron Technology (MU) and a pair of Korean companies,
(000660-Korea). NAND players include Micron, Western Digital, its joint venture partner Kioxia, and, again, Samsung and Hynix.
I’ve featured the issue several times in this space for Western Digital and Micron, and now I’m going to hit the table even more, while providing new reasons for my confidence.
Let’s start with the end result, literally. Micron is one of the cheapest stocks in the market on a price/earnings basis – trading around five times the expected earnings for the next 12 months. I can’t find cheaper tech stock. Meanwhile, Western Digital is trading at six times the earnings for the same period. This makes it the second cheapest technical stock.
This is more than just cheap stocks. Micron and Western Digital held analyst meetings in San Francisco last week, and some common themes emerged. Both companies have radically different end markets than they did just five years ago — their close ties to the PC market are fading.
Competitor Western Digital and Seagate primarily provide high-capacity drives for cloud applications. And in case you haven’t noticed, spending on the cloud is still going up.
(GOOGL) continues to report strong and accelerated growth in its cloud business. I don’t know if the metaverse will ever really exist, but if it does, it will live on drives. You can’t do cryptography, machine learning, or artificial intelligence without racks from Western Digital and Seagate.
Like the drive companies, Micron’s business has been under the control of both computers and smartphones for a long time. But this, too, is rapidly changing. Sumit Sadana, Micron’s chief business officer, said last week that the company expects the PC and mobile markets to account for 38% of the company’s total revenue in fiscal year 2025, down from 55% in 2021. It expects data centers to be 42% of business by 2025, up from 30%. Automotive, industry and network markets should rise to 20% of revenue from 15%. Sadana said the shifts will lead to higher growth, reduced seasonality and more predictable financial performance.
Some investors are pushing for a bolder approach to unlocking value. Activist investor Elliott Management recently disclosed a 6% stake in Western Digital, calling on the company to separate its hard drive and NAND business. Western entered the NAND business in 2016 with the $16 billion acquisition of SanDisk. Six years later, the market capitalization of the entire company was $17 billion.
Elliott argued in a letter to Western’s board of directors that the company’s stock could double if the business were separated. Elliot estimates the value of Western NAND’s business at $17 billion to $20 billion. If true, investors will get the hard drive business for free.
Micron sounds totally cheap, but don’t take my word for it. “Our stock, which we believe is undervalued,” Sadana told me last week.
At the company’s analysts meeting last week, Micron estimated the replacement cost for its turnkey manufacturing and research and development facilities at nearly $100 billion. This gives the company absolutely no credit for its engineering talent and 50,000 patents. On this basis alone, Micron’s market cap of $75 billion seems inconsequential. Micron has accelerated its share buyback program — the company said it has already repurchased $700 million of stock in the current quarter, and has not finished the purchase.
At the meeting, Micron Chief Financial Officer Mark Murphy laid out a new long-term financial model for the company, which includes cross-cycle revenue growth in the high single digits, 30% operating margins, and better than 10% free cash. flow margins. He points out that Micron intends to pay 100% of free cash flow to its holders in the future. The company raised its dividend last week by 15%. You can expect more hikes in the coming years.
There is no doubt that in the current environment some investors will be tempted to fish for some tech stocks that have been crushed to the bottom – and many of them will grow faster than Western or Micron. But these two companies are the cheapest tech stocks anywhere, with improved prospects, expanding markets to tackle, and the potential for big returns.
They are not fully appreciated.
write to Eric J. Savitz at [email protected]