We recently compiled a list of the 16 Most Undervalued Stocks to Buy Now. In this article, we are going to take a look at where Micron Technology, Inc. (NASDAQ:MU) stands against the other undervalued stocks.
With the US stock market touching record highs, mainly driven by significant contributions from big technology sectors, domestic and global investors continue to observe market dynamics to tap potential opportunities. Therefore, identifying undervalued stocks becomes important as they might provide substantial value amidst high valuations across sectors.
Concentration of S&P 500
Courtesy of “Magnificent 7” stocks that captured investor attention in 2024, the market cap concentration in the leading US equities is the highest in decades. Strategists at Goldman Sachs believe the 10 largest US stocks now constitute ~33% of the S&P 500 index’s market value. This is well above the ~27% share reached at the peak of the tech bubble which was seen in 2000.
The present concentration helped in driving a period of strong US market returns. The market saw an annualized total return of ~16% over the previous 5 years. This compares to the 30-year annual average of 10%. As per Goldman Sachs, the top 10 stocks made up for over a third of that gain. That being said, “today’s top stocks are trading at lower valuations than the largest stocks did at the peak of the tech bubble in 2000.”
Despite healthy returns, investors are anxious regarding the extreme current degree of market concentration relative to the recent history.
There appear to be similarities between the current conditions today and the episodes in 1973 and 2000. The labor market seems to be in a decent state, and concentration has been rising along with robust equity market returns. In these episodes, the peak of equity market concentration also led to the peak of a bull market, and the US economy saw recessionary fears in the subsequent year.
However, the 1964 experience reflects that an ongoing bull market might continue to move higher despite a decline in market concentration. After the market concentration peaked, stock prices and the US economy were resilient for an extended period.
Are The US Stocks Overvalued or Undervalued?
The valuations of the largest stocks are well below the previous highs. As of now, the 10 largest stocks continue to trade at the collective forward P/E multiple of ~25x, well below the peak valuations seen in the largest stocks in 2000, 2020, and the middle of 2023.
The valuations are also lower based on the premium the largest stocks are trading at relative to the rest of the market. That is to say that the ~35% valuation premium today remains well below the 80% premium seen in the middle of 2023 and the 100% premium of 2000. Though the degree of market cap concentration is indeed higher today as compared to the peak touched in 2000, the largest stocks are trading at much lower multiples than during the technology bubble.
Our methodology
We used the Finviz screener to extract the list of 16 Most Undervalued Stocks to Buy Now. We have shortlisted the stocks that are expected to report earnings growth this year and have a forward P/E multiple of less than ~21.66x (as the market trades at the forward multiple of ~21.66x). We ranked the stocks in ascending order of their hedge fund sentiment.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close-up view of a computer motherboard with integrated semiconductor chips.
Micron Technology, Inc. (NASDAQ:MU)
Forward P/E as of 22 August: 12.58x
Expected EPS Growth this Year: Over 100%
Number of Hedge Fund Holders: 120
Micron Technology, Inc. (NASDAQ:MU) historically focused on designing and manufacturing DRAM for PCs. The firm then expanded into NAND flash memory market.
The company’s management believes that Micron Technology, Inc. (NASDAQ:MU) should generate “several hundred million dollars” in HBM (high-bandwidth memory) revenue in FY24. The management is even optimistic for FY25. They believe the company has the potential to earn “multiple billions of dollars in revenue from HBM.”
Micron Technology, Inc. (NASDAQ:MU) has sold out its HBM capacity for this year and the following year.
Now, it focuses on winning a bigger share of the HBM market. This is expected to take place by expanding the customer base and developing HBM chips which could deliver more power and efficiency. The growth in the HBM market is directly related to the increased Al-chip demand. Therefore, an Al-fueled rally in the memory market should help the company in delivering earnings growth.
The rebound in memory prices and favorable inventory balances continue to work in the favor of Micron Technology, Inc. (NASDAQ: MU), helping it to post strong revenues. In 3Q 2024, the company saw 17% sequential revenue growth, exceeding its guidance range, to $6.81 billion. This was seen on the back of strong Al demand and healthy execution.
Analysts at Rosenblatt Securities gave a “Buy” rating on the shares of Micron Technology, Inc. (NASDAQ:MU), issuing a $225.00 price objective on 25th June.
ClearBridge Investments, an investment management company, released its second quarter 2024 investor letter and mentioned Micron Technology, Inc. (NASDAQ:MU). Here is what the fund said:
“Stock selection in the IT sector proved to be the largest contributor to performance, particularly driven by the strong performance of Micron Technology, Inc. (NASDAQ:MU) The company, which designs, develops, manufactures and sells memory and storage products, continued its strong performance alongside other AI beneficiaries as the anticipated demand for new and additional storage essential for housing and training large language AI models continues to grow.”
Overall MU ranks 1st on our list of the most undervalued stocks to buy. While we acknowledge the potential of MU as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than MU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
