| | | I also received the text of a Barron's interview with a guy named Paul Wick. The entire interview is pretty long, so I have snipped the sections that pertain to MU and WDC below since some of us invest in both stocks. This was published on Friday, 19th.
Paul Wick: How to Play the Big Trends in Tech -- Barrons.com
11:13 PM ET 1/19/18 | Dow Jones
Wick: I'll start off with some long ideas in semiconductors. Micron Technology[ticker: MU] reported earnings a few weeks ago. The company significantly exceeded expectations. It is growing revenue by more than 50% a year. In fact, over the past couple of years, revenue has grown by more than 100%. And Micron's profit margins have expanded significantly. Operating margins are now in the high-40% area.
What has been driving margins up?
Wick: Partly, the cost to add new leading edge capacity has gotten so high that people aren't adding new capacity as easily as in the past. You can't just buy a new lithography tool, turn it on, do a node shrink, and have 30% or 40% more bits anymore. Now you get 10% more bits, or at most 15% more bits.
Wick: I don't know whether the current degree of profitability is sustainable, but we aren't going to get down to a cyclical low with the companies losing money again. The balance sheet has been cleaned up. Micron generated $1.7 billion in free cash flow in the latest quarter. The annualized free cash flow is about $7.5 billion to $8 billion. The enterprise value is about $53 billion. There is a little more delevering to come. They'll probably pay down another $2 billion or so of debt and then announce a meaningful share repurchase and capital return later in 2018.
What could Micron earn at the cycle trough?
Wick: That's hard to say -- I'd guess $4 a share or thereabouts.
Oscar Schafer: Regarding timing, will people buy the stock once the cycle starts down?
Wick: These stocks could get rerated dramatically higher. Things like artificial intelligence and autonomous cars are going to require a vast amount of memory. Yet the perception is that we still have the memory market of 15 or 20 years ago. The key thing is that the cost of new capacity has tripled in five years, and that changes everything.
Micron has a great CEO, Sanjay Mehotra, who had been CEO of SanDisk. He inspires confidence. The stock could be $60, $70, $80 over the course of the next year. I like the risk/reward, and if I'm wrong, it doesn't go down a lot.
What else do you like?
Wick: Western Digital is the old Western Digital magnetic disk-drive company that competed with Seagate Technology [STX] before acquiring SanDisk. The way to think about the company is, it is half disk drive and half flash memory. I recommended Western Digital, along with Micron, in an interview in Barron's in April . Micron is up significantly since, whereas Western Digital has gone sideways. Part of that is NAND flash prices have been fairly flat, and recently softened slightly. Also, Western Digital got into a dispute with its joint-venture partner, Toshiba, over Toshiba possibly selling a stake in Toshiba memory to either Western Digital or other companies. They've buried the hatchet and extended the terms of the joint venture out to 2029, I believe.
Western Digital announced that in early December. At the same time, the company reiterated that it would earn more than $13 a share in the June 2018 fiscal year. The stock is around $80 a share. It is trading for six times earnings.
What does the balance sheet look like?
Wick: Western Digital has a lot of debt on the balance sheet, but the company generates a prodigious amount of free cash flow per year -- north of $3 billion a year. They have some high-cost debt, and will significantly delever the balance sheet in the next couple of years. They even have some debt that has 10% coupon rates on it that's callable in April 2019. That will get called. You are going to see share repurchases, as well. The valuation is just too low. Again, there is a perception that if flash prices fall, somehow the P&L [profit and loss] statement of the company has to get obliterated.
Management said a few weeks ago that the company would be above its target profit margins for all of calendar 2018, a pretty confident statement.
How high could Western Digital's stock go from here?
Wick: The stock could go to $120. It is amazing to me that Seagate trades at a premium to Western Digital, given that Seagate is pretty much a pure magnetic disk-drive company. Inevitably, over time, magnetic disk drives are going away. At least with Western Digital, they have future-proofed the company to some degree by having flash memory as well as magnetic storage.
UWG |
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