Micron Technology vs. Western Digital: Which Semiconductor Stock is a Better Buy?

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Micron Technology, Inc. (MU) and Western Digital Corporation (WDC) are two prominent players in the storage products and solutions worldwide. MU manufactures and markets a portfolio of memory technologies for solid-state drives, modules, multi-chip packages and other system solutions.  WDC provides datacenter devices and solutions, client devices and client solutions.

Continued demand for tech devices from industries, corporations and remote workforces has helped the semiconductor industry to witness  month-over-month sales growth of 4.1% in May 2021. To address the semiconductor chip shortage, the US Senate passed a bill that will  allocate $52 billion to boost the domestic production of semiconductors. This, along with increasing initiatives by the governments of several other countries and enterprises to address the global chip shortage, has boosted investor optimism about  the industry’s growth prospects. This is evidenced by the  SPDR S&P Semiconductor ETF’s (XSD) 4% gains versus the SPDR S&P 500 Trust ETF’s (SPY) 3% returns over the past month. Therefore, we think both MU and WDC are likely to benefit from their industry tailwinds.

Click here to checkout our Semiconductor Industry Report for 2021

While MU gained 57% over the past nine months, WDC surged 85%. But in terms of their past year’s performance, WDC is a clear winner with 67.6% gains versus MU’s 56.9%. So, which of these stocks is a better pick now? Let’s find out.

Latest Movements

On June 1, MU introduced new memory and storage products based on its industry-leading 176-layer NAND and 1-Alpha DRAM technology, as well as the industry’s first Universal Flash Storage (UFS) 3.1 solution for automotive applications. Amid the high demand for memory and flash chips in the developing data economy, MU’s portfolio additions should accelerate data-driven insights and enable new capabilities from the datacenter to the intelligent edge. With power-efficiency improvements for memory enabling longer battery life in consumer devices, MU expects the new products to generate good sales in the near-term.

On March 2, MU’s global consumer brand for memory and storage, named Crucial, launched a high capacity 4TB portable SSD and a new 500GB portable SSD that will allow users to store all their important documents, videos, music, photos and games. These additions to its Crucial X6 portable SSD lineup are expected to gain expanded market reach in the external solid-state storage market.

On June 22, 2021, WDC announced its second-generation UFS 3.1 storage solution for smartphones, named Western Digital iNAND MC EU551, that delivers high-performance storage for consumers, while using ultra-high-resolution cameras, AR/VR, gaming and 8K video and other applications. As networks continue to expand available bandwidth and offer lower latency to enable new user experiences, WDC’s iNAND solutions are expected to witness good demand in the coming months.

WDC announced the availability of its new high-performance Ultrastar Edge server family on June 15. It  brings compute closer to where data is generated for faster processing, lower latency and real-time decision making, even when disconnected. Amid the growing adoption of 5G, IoT and the cloud, the need for secure and easy transport, deployment and analysis of data at the edge is likely to generate  high demand in the coming months.

Recent Financial Results

MU’s revenue for its fiscal third quarter, ended June 3, 2021, increased 36.5% year-over-year to $7.42 billion. The company’s non-GAAP gross profit has been reported at $3.19 billion, which represents a 76.6% improvement year-over-year. Its non-GAAP operating income came in at $2.36 billion, up 141% from the prior-year period. MU’s non-GAAP net income is reported to be $2.17 billion for the quarter, which represents a 130.9% year-over-year improvement. Its non-GAAP EPS increased 129.3% year-over-year to $1.88. As of June 3, 2021, the company had $7.76 billion in cash and cash equivalents.

For its fiscal third quarter, ended April 2, 2021, WDC’s revenue decreased marginally year-over-year to $4.14 billion. The company’s non-GAAP gross profit came in at $1.14 billion, down 1.8% from the prior-year period. Its non-GAAP operating income was  $412 million, which represents a 3.5% year-over-year decline. However, its non-GAAP net income increased 23.7% year-over-year to $318 million and its non-GAAP EPS increased 20% year-over-year to $1.02. As of April 2, 2021, the company had $2.73 billion in total cash and cash equivalents.

Past and Expected Financial Performance

MU’s total assets have grown at a 10.2% CAGR over the past three years. Analysts expect MU’s revenue to increase 35.2% year-over-year in the current quarter (ending August 31, 2021), 28.9% in the current year and 34.2% next year. Its EPS is expected to increase 115% year-over-year in the current quarter, 111.1% for the current year, and 94.1% next year. The stock’s EPS is expected to grow at 63.6% rate per annum over the next five years.

In comparison, WDC’s total assets have declined at a 4.3% CAGR  over the past three years. Analysts expect WDC’s revenue to increase 24.4% in the current quarter (ending September 30, 2021), but decline 1.2% in the current year, and then increase 21.6% next year. Its EPS is expected to increase 206.4% year-over-year in the current quarter, 26.7% in the current year and 127.7% next year. Analysts expect the stock’s EPS to grow at a 47.8% rate  per annum over the next five years.

Profitability

MU’s trailing-12-month revenue is 1.6 times  WDC’s. MU is also more profitable, with a 33.7% gross profit margin versus WDC’s 24.5%.

Also, MU’s ROE, ROA and ROTC values of 10.3%, 5.8% and 6.6%, respectively, compare favorably with WDC’s 3.6%, 1.8% and 2.4%.

Valuation

In terms of non-GAAP forward P/E, WDC is currently trading at 18.41x, which is 38.2% higher than MU’s 13.32x. WDC’s 0.86x non-GAAP forward PEG is 10.3% higher than MU’s 0.78x.

In terms of forward EV/EBITDA, WDC’s 9.73x is 47% higher than MU’s 6.62x.

Thus, MU is more affordable here.

POWR Ratings

While WDC has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, MU has an overall B grade, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

MU has a B grade for Quality, which is consistent with its higher-than-industry profitability ratios. The company’s 43.8% trailing-12-month EBITDA margin is 206.5% higher than the 14.3% industry average. In comparison, WDC’s C grade for Quality is in sync with its relatively lower profit margin. The company has a 12.7% EBITDA margin, which is 11.5% lower than the 14.3% industry average.

In terms of Value, MU has been graded a B, which is in sync with its lower-than-industry valuation ratios. MU’s 17.24x trailing-12-month EV/EBIT value  is 35.4% lower than the 26.67x industry average. However, WDC’s C grade for Value is in sync with slightly higher valuation ratios compared to its peers. The company has a 38.83x trailing-12-month EV/EBIT, which is 45.6% higher than the 26.67x industry average.

Of 99 stocks in the B-rated Semiconductor & Wireless Chip industry, MU is ranked #19.

WDC is ranked #31 of 45 stocks in the B-rated Technology – Hardware industry.

Beyond what we’ve stated above, our POWR Ratings system has also rated both MU and WDC for Growth, Momentum, Sentiment, and Stability.

Get all WDC ratings here. Also, click here to see the additional POWR Ratings for MU.

The Winner

Growing demand from consumer electronics and electric vehicles, combined with the latest developments made in improving DRAM and NAND flash memory, should enable both MU and WDC to generate  further growth. However, we think that higher profitability, better financials and a lower valuation make MU the  better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry, and here for those in the Technology – Hardware industry.

Click here to checkout our Semiconductor Industry Report for 2021


MU shares were trading at $78.35 per share on Tuesday morning, down $1.21 (-1.52%). Year-to-date, MU has gained 4.22%, versus a 17.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More…

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