Micron Technology (MU) stock is up again over 5% today, and unusual options activity is seen in a Barchart report. Analysts keep raising their revenue and price targets over the next two years. As a result, MU stock could still be 18% undervalued. This article will show why.
MU is at $523.35 in midday trading, up over 5.3% on the day. It has soared since bottoming out on March 30 at $321.80. However, it could be worth as much as $620 per share based on strong free cash flow (FCF) expectations.
Strong Free Cash Flow Forecasts
Micron's strong results on March 18, as well as its comments on forecasted AI-related demand for its memory chips, have led analysts to upgrade their revenue targets.
I discussed this in a March 22 Barchart article, as well as an update in an April 14 article, “Analysts Hike Their Micron Estimates, Pushing MU Stock Price Targets Higher.”
Since then, revenue estimates are even higher, based on Seeking Alpha's survey of 35 analysts:
Yr ended Aug 2026 ………. $108.91 billion
Yr ended Aug 2027 ………. $169.13 billion
Next 12 months (NTM) … $139.0 billion NTM revenue
In the first half of its fiscal year ending Feb. 28, Micron's adjusted free cash flow was 28.8% (i.e., $10.8 billion adj FCF / $37.5 billlion revenue).
Therefore, applying this margin to our NTM revenue estimate:
$139b x 0.288 = $40 billion adj. FCF
In other words, we can expect a dramatic increase in FCF. That could push Micron's valuation higher.
Higher MU Price Targets
For example, using a 5.738% FCF yield metric as I did in my last article, which is the same as multiplying its adj. FCF by 17.42x, we can estimate Micron's future market value.
To be conservative, let's use a 17.5x multiple:
$40b x 17.5 = $700 billion market value
Today, Micron's market cap is $590.5 billion, according to Yahoo! Finance. That implies MU stock's price target is 18.5% (i.e., $700b/$590.5b -1) higher:
523.35 x 1.185 = $620.17 per share
Analysts have higher price targets as well. Yahoo! Finance now says the average of 42 analysts is $533.72, and Barchart's mean survey price is $546.09.
The bottom line is that MU stock still looks undervalued.
No wonder there is huge options activity in MU put and call options.
Unusual MU Options Trades
This can be seen in today's Barchart Unusual Stock Options Activity Report. It shows, for example, that over 90x the prior number of out-of-the-money ($510) put options have traded for expiry on May 1.
In addition, over 26x higher volume of May 1 puts at the $525.00 strike price traded. This is an at-the-money (ATM) or slightly in-the-money put contract.
Note that this provides an investor who sells these puts with great yields.
For example, the $510 put provides a $15.65 premium, a 3.0% yield over the next 4 days (i.e., $15.65/$510). The $525.00 put play provides a 4.3% yield (i.e., $22.62/$525).
In addition, the breakeven points for these investors are significantly lower: i.e., $510 - $15.65 = $494.35, or 5.5% below today's price.
The bottom line is that shorting these puts provides investors with attractive buy-in points and high yields for long-term investors in MU stock.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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