Micron Technology, Inc. A Look at the Intrinsic Value of (NASDAQ:MU)

Is Micron Technology, Inc. For July stock price (NASDAQ:MU) reflect what it’s really worth? Today, we will estimate the intrinsic value of a stock by taking expected future cash flows and discounting them to today’s value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don’t be put off by the jargon, the math behind it is actually quite straightforward.

We generally assume that the value of a company is the present value of all cash it will generate in the future. However, a DCF is just one evaluation metric among many, and it is not without flaws. Anyone interested in learning a little more about intrinsic value should have a read of Simply Wall Cent Analysis Models.

See our latest analysis for Micron Technology

Is Micron technology of great importance?

We are going to use a two-stage DCF model that, as the name suggests, takes into account two stages of development. The first phase is typically a high growth period moving towards terminal price, captured in the second ‘steady growth’ period. To begin with, we need to get an estimate of the cash flows for the next ten years. Where possible we use analyst estimates, but when these are not available we extrapolate past free cash flow (FCF) from previous estimates or reported value. We believe that companies with shrinking free cash flows will slow their rate of shrinkage, and companies with growing free cash flows will see their growth slow over this period. We do this to show that the growth trend tends to be slower in the early years than in the later years.

Typically we assume that a dollar is worth more today than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at the present value estimate:

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10 Year Free Cash Flow (FCF) Estimation

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Leveraged FCF ($, million)

US$5.19b

US$6.42b

US$6.16b

US$4.45b

US$4.34b

US$4.28b

US$4.27b

US$4.29b

US$4.33b

US$4.38b

Growth Rate Estimation Source

analyzer x10

analyzer x7

analyzer x2

analyzer x1

Est @ -2.55%

Est @ -1.2%

Est @ -0.26%

Est @ 0.4%

Est @ 0.86%

Estimated @ 1.19%

Present Value ($, million) discount @ 7.2%

US$4.8k

US$5.6k

US$5.0k

US$3.4k

US$3.1k

US$2.8k

US$2.6k

US$2.5k

US$2.3k

US$2.2k

(“Est” = FCF Growth Rate Estimated by Simple Wall St.)
Present Value of 10 Years Cash Flows (PVCF) = US$34b

The second stage, also known as the terminal value, is the cash flow of the business after the first stage. For several reasons a very conservative growth rate is used that cannot exceed the growth rate of a country’s GDP. In this case we have used the 5-year average of the 10-year government bond yield (1.9%) to estimate future growth. In the same way as with a 10-year ‘growth’ period, we discount future cash flows to today’s value using a cost of equity of 7.2%.

Terminal Value (TV)= FCF2032 × (1 + g) (r – g) = US$4.4b× (1 + 1.9%) (7.2% – 1.9%) = US$85b

Present Value of Terminal Value (PVTV)= Tv / (1 + r)10= US$85b÷ ( 1 + 7.2%)10= US$42b

The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is US$76b. The final step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of US$62.1, the company appears to be at about a 10% discount to the fair value where the stock price currently trades. However, remember that this is just an approximate evaluation, and like any complex formula – garbage in, garbage out.

DCF

DCF

Estimate

Now the most important inputs for Discounted Cash Flow are the discount rate and of course the actual cash flow. You don’t need to agree with these inputs, I recommend you to redo the calculations and play with them. The DCF also doesn’t consider an industry’s potential cyclicality or a company’s future capital needs, so it doesn’t give a complete picture of a company’s potential performance. Given that we are looking at Micron Technology as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC), which is used for debt. Is responsible. In this calculation we have used 7.2%, which is based on a leveraged beta of 1.244. Beta is a measure of a stock’s volatility compared to the market as a whole. We derive our beta from the industry average beta of globally comparable companies, with a set range between 0.8 and 2.0, a reasonable range for a stable business.

moving on:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to evaluate for a company. It is not possible to obtain a foolproof evaluation with the DCF model. Rather, it should be viewed as a guide to “What assumptions need to be true for this stock to be undervalued/overvalued?” For example, if the terminal price growth rate is adjusted slightly, it can dramatically change the overall result. For Micron Technology, we’ve put together three relevant items you should explore:

  1. financial healthIs MU’s balance sheet healthy? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. future earningsHow does MU’s growth rate compare to that of its peers and the broader market? Dig deeper into analyst consensus numbers for years to come by chatting with our free analyst growth expectancy chart.

  3. Other high quality options: Do you like a good all-rounder? Explore our interactive list of high quality stocks to find out what else you have in store!

ps. Simply Wall St updates its DCF calculation every day for every US stock, so if you want to find the intrinsic value of another stock just search here.

Feedback on this article? Worried about the content? keep in touch directly with us. Alternatively, email the editorial-team (at) simplewallst.com.

This article by Simple Wall St. is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to be financial advice. It does not recommend buying or selling any stock, and does not take into account your objectives, or your financial situation. We aim to bring you long-term focused analytics powered by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative content. Simple Wall St does not have a position in any of the stocks mentioned.

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