Micron Technology Stock Analysis - Mohnish Pabrai's Top Holding

The hosts introduce Micron Technology (MU) as one of Mohnish Pabrai's top holdings. They mention the stock is up 10% on earnings day and discuss their plan to analyze it using their proprietary stock analyzer tool.

The team begins their Eight Pillars analysis starting with Micron's valuation. They find a very attractive five-year PE of 14.9 (below their 22.5 threshold) but a slightly weak return on invested capital at 7.2% versus their preferred 9%.

The hosts examine Micron's revenue growth over five years and are concerned by extreme volatility. Revenue fluctuates dramatically between $8-30 billion across different years, raising questions about business stability. They note this pattern needs explanation.

Continuing the Eight Pillars framework, the team finds net income is also highly volatile, jumping from $5.09B to $14.1B to $6.3B and back. Shares outstanding increased slightly from 1.11B to 1.12B, barely failing their anti-dilution test.

The debt analysis reveals a positive finding. Micron has only $8.49B in long-term liabilities against a five-year average free cash flow of $3.57B (times 5 equals $17.8B threshold), meaning they could pay off all debt in less than 2.5 years.

Free cash flow shows similar volatility to revenue and earnings. The five-year average is $3.57B but individual years are highly erratic. The team is puzzled by such choppy performance from an established $100B company and seeks to understand the underlying causes.

The team discovers the critical insight: Micron's capital expenditures doubled starting in 2018 when a new CEO arrived. They're investing heavily in new plants and R&D with a $150 billion spending commitment, temporarily depressing free cash flow but setting up future growth.

Paul explains that Pabrai likely sees the heavy capital expenditures as temporary. Once the investments are complete, free cash flow could jump from $3.57B to $8.5B annually. At a $100B market cap, that's only 11-12x free cash flow - potentially very attractive for a quality company.

Using their proprietary stock analyzer tool, the team models three scenarios with 4%, 6%, and 8% revenue growth. They adjust the free cash flow multiple upward (25-31x) to account for temporary CapEx depression. The analysis suggests fair value around current prices before the 10% jump.

Paul delivers a powerful lesson by showing Micron's stock is the same price as in 2000, despite revenue growing 10x from $2.5B to $27B. This illustrates how overpaying for even a great business can lead to zero returns over 20+ years.

Mo provides technical analysis showing Micron gapped up on earnings but is likely to pull back to the $84 area. The trapdoor indicator shows downtrend risk. He recommends taking profits on the gap and waiting for a pullback before re-entering for swing trades.