Micron Stock Vs NVIDIA Stock: Which Is A Better Buy ?
Micron Technology Inc. and NVIDIA Corporation are still among the hottest stocks in the market.
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Despite each stock seeing a decent correction from their all-time highs, the semiconductor hot stocks Micron (NASDAQ:MU) and NVIDIA (NASDAQ:NVDA) have performed well so far in 2018. Both Micron and NVIDIA stocks have generated multifold returns over the last two years, yet they are still on a strong growth track. Micron stock has flourished on account of improving fundamentals, taking advantage of the strong memory prices in the market while NVIDIA stock has benefitted from the newly found GPU demand for data center, AI, Machine learning and autonomous driving applications apart from its core segment growth. It is more than likely that both Micron and NVIDIA can still continue their momentum for the rest of the year. However, let’s take a look at how the two stocks have faired on fundamental metrics like operating performance, growth rate, balance sheet, valuation and others.
MU stock by uniquefinance.org
Operating Performance – Winner: Micron
Micron has significantly higher revenue as well as higher operating margins allowing them to produce larger profits. In 2017, Micron produced $5.86 billion in operating profit versus only $3.21 billion in operating profit for NVIDIA in 2018. If you consider the latest 9 months ended 2018 Q3, operating profit is much higher for Micron. Operating profit stood at $10.67 billion. We have to also be mindful that NVIDIA is valued at a higher level (Enterprise Value of $61.83 billion versus $140.9 billion for NVIDIA), so Micron’s lead on operating profit is more significant than just looking at the numbers. Micron also grew sales by 63.90% during 2017, which is also favorable to NVIDIA at 40.58% in 2018. Even, the revenue growth for last nine months ended in Q3 2018 is also much higher for Micron at 54.76%. Except for the year 2016, Micron has a clear edge on NVIDIA when it comes to operating performance.
| Micron Operations (in millions)- Fiscal year is Sep – Aug | |||||
| 2015 | 2016 | 2017 | Latest Quarter- 2018 Q3 | Nine months ended 2018 Q3 | |
| Revenue | $16,192 | $12,399 | $20,322 | $7,797 | $21,951 |
| Operating Profit | $2,998 | $168 | $5,868 | $3,953 | $10,671 |
| Operating margin | 18.52% | 1.35% | 28.88% | 50.70% | 48.61% |
| Net Income(loss) | $2,899 | ($275) | $5,090 | $3,823 | $9,810 |
| Profit Margin | 17.90% | -2.22% | 25.05% | 49.03% | 44.69% |
| Earnings Per Share | $2.47 | ($0.27) | $4.41 | $3.10 | $7.96 |
Data Source: Micron Income Statement
| NVIDIA Operations (in millions) – Fiscal year is Feb – Jan | ||||
| 2016 | 2017 | 2018 | Latest Quarter- 2019 Q1 | |
| Revenue | $5,010 | $6,910 | $9,714 | $3,207 |
| Operating Profit | $747 | $1,934 | $3,210 | $1,295 |
| Operating margin | 14.91% | 27.99% | 33.05% | 40.38% |
| Net Income(loss) | $614 | $1,666 | $3,047 | $1,244 |
| Profit Margin | 12.26% | 24.11% | 31.37% | 38.79% |
| Earnings Per Share | $1.08 | $2.57 | $4.82 | $1.98 |
Data Source: NVIDIA Income Statement
Free Cash Flow – Winner: Micron
Free cash flow is one of the most important operating metrics which drives investments, acquisitions, dividends, stock repurchases, and debt levels. Micron produced more than thrice the amount of free cash flow than NVIDIA did during the last quarter. The excellent cash flows have also helped it in the acquisition of Inotera.
| Micron Free Cash Flows(in millions)- Fiscal year is Sep – Aug | ||||
| 2015 | 2016 | 2017 | Latest Quarter- 2018 Q3 | |
| Operating Cash Flow | $5,208 | $3,168 | $8,153 | $12,245 |
| Capital Expenditures | ($2,998) | ($5,817) | ($4,734) | ($6,628) |
| Free Cash Flow | $2,210 | ($2,649) | $3,419 | $5,617 |
| NVIDIA Operations (in millions) – Fiscal year is Feb – Jan | ||||
| 2016 | 2017 | 2018 | Latest Quarter- 2019 Q1 | |
| Operating Cash Flow | $1,175 | $1,672 | $3,502 | $1,445 |
| Capital Expenditures | ($86) | ($176) | ($593) | ($118) |
| Free Cash Flow | $1,089 | $1,496 | $2,909 | $1,327 |
Balance Sheet – Winner: NVIDIA
Both companies have good balance sheets, but NVIDIA’s is much better. NVIDIA has built a decent cash war chest and has very less debt. Micron had taken on significant debt over the last two fiscal years, which increased considerably during 2016 and even was downgraded by analysts back then stating that they weren’t sure if the chipmaker would be able to service its debt. However, the situation has improved drastically from then with the debt levels coming down by more than 40% as of the latest June quarter. The rate at which debt levels are reducing is promising, but still, the company has significant debt on its balance sheet. Here, NVIDIA is the clear winner with debt level remaining constant over the past two years and that too at a very low level compared to Micron. NVIDIA handsomely beats Micron when it comes to the current ratio metric.
| Micron Balance sheet (in millions)- Fiscal year is Sep – Aug | ||||
| 2015 | 2016 | 2017 | Latest Quarter- 2018 Q3 | |
| Cash | $2,287 | $4,140 | $5,109 | $6,808 |
| Long Term Debt | $6,252 | $9,154 | $9,872 | $5,890 |
| Current Ratio | 2.20 | 1.96 | 2.34 | 2.63 |
| NVIDIA Balance sheet (in millions)- Fiscal year is Feb – Jan | ||||
| 2016 | 2017 | 2018 | Latest Quarter- 2019 Q1 | |
| Cash | $5,037 | $6,798 | $7,108 | $7,300 |
| Long Term Debt | $0 | $1,983 | $1,985 | $1,986 |
| Current Ratio | 2.57 | 4.77 | 8.02 | 8.54 |
Valuation – Winner: Micron
Micron stock leaves behind NVIDIA significantly when it comes to valuations. With Micron, you get a much better growth rate and at the same time valuations are remarkably cheaper across the board. Micron is clearly undervalued compared to other top chip stocks. NVIDIA’s valuations are highest among the top chip stocks based on forward earnings with the market betting on data center and AI and autonomous driving chips to drive the future growth for NVIDIA. The GPU maker even comes second best even when we compare the long-term growth with Micron having the lead in all important valuation metrics.
| Top Chip Stocks Growth Comparison | |||||
| EV | Forward P/E | EV/FCF | PEG Ratio | Long-term Growth | |
| Micron | $66.50 | 4.47 | 8.076 | 0.12 | 37.25% |
| NVIDIA | $147.03 | 30.60 | 34.56 | 2.36 | 12.97% |
| AMD | $15.66 | 24.18 | 102.58 | 81.48 | 0.30% |
| Intel | $244.06 | 12.01 | 20.75 | 1.26 | 9.53% |
Data source: Yahoo finance, Ycharts
Wall Street’s Opinion – Winner: Micron
Wall Street is bullish on both Micron and NVIDIA stocks. However, Micron has almost no detractors with zero underperform and sell ratings. Even when it comes to buy and strong buy ratings Micron has a big lead over NVIDIA in terms of percentage. Target prices too suggest much more upside potential for Micron. According to Yahoo finance, the average target price for Micron is $80.93, which represents a tremendous upside of more than 54% based on the closing price as of June 29. The average target price for NVIDIA is $280.66, which represents 16.5% upside based on closing price of the same date as the latter.
| Wall Street Buy/Sell recommendations | ||||
| Micron | NVIDIA | |||
| Buy | 8 | 26.67% | 7 | 18.42% |
| Strong Buy | 19 | 63.33% | 14 | 36.84% |
| Hold | 3 | 10% | 12 | 31.58% |
| Underperform | 0 | 0% | 4 | 10.52% |
| Sell | 0 | 0% | 1 | 2.63% |
Risk Profile – Winner: Micron
Comparing the stocks based on their risk profile, NVIDIA’s valuation is almost near its 5-year high. A large percentage of the stock price increase has been a result of increasing Price/Sales multiples, which is now at 13.5x, significantly higher than the semiconductor industry average. Micron stock doesn’t have this risk. Not only are the DRAM maker’s current Price/Sales, Forward Earnings, and EV/FCF very reasonable, they are all much lower than other top chip stocks. Micron trades near an all-time high, yet valuation multiples have gone nowhere. This is an important distinction between the two stocks since each has reached all-time highs, but Micron still remains largely undervalued. However, Micron possesses a different kind of risk with its business known to be very cyclical. The memory chip industry in which it operates has been notorious for its “Boom-Bust” cycles. A fellow analyst at Amigobulls has in detail explained Micron’s case for higher valuation multiple.
Summary.
In my opinion, there’s a number of factors that make Micron look much more attractive when compared to NVIDIA. Micron trades cheaper on every major valuation multiple. In particular, a remarkably lower PEG ratio is compelling. Again, Micron’s enterprise value is less than that of NVIDIA, but produces better profits, better free cash flow, and even a better level of long-term growth. Micron has shown tremendous improvement in fundamentals from being cash flow negative two years back to almost 4x the cash flow of NVIDIA in the latest quarter. However, NVIDIA scores over Micron in long-term debt and cash levels. Having said that Micron stock has earned its stock price purely through strong performance while there is some hype in NVIDIA’s stock price. Micron stock is still largely undervalued and has immense untapped potential the cyclical business risks loom heavy on the stock price. The strong future performances of the company are likely to yield great upside in the stock.
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