Micron is a cyclical stock with uncertain valuation (range $556-$1,016); as a long-term investor, avoid it, but it can be traded short-term.

Now let's take a look at another very different type of stock. One that's very popular is micron ticker symbol MU. So if you look at micron the question would be how do you value the stock?

Again, which method do you use? Can we use the discounted free free cash flow method, which is my favorite? We cannot because this business doesn't have a history of consistently increasing free cash flow or consistently increasing cash from operations.

So, if we look at the financials, click on financials. And uh again, you can look at the bar chart or the line chart, up to you. So, uh take a look over here. Look at the history of the operating cash flow in orange.

It goes up, it goes down, it goes up, it goes down, and now it's all the way up there. So, it is at a high right here. So, it is very inconsistent. It is very cyclical.

Same thing if you look at the free cash flow, is it consistently increasing like Mastercard? No, it is very inconsistent.

Uh, look at the free cash flow in dark green. You can see it goes up, it goes down, up, negative, up, flat, and goes up. So when it's so inconsistent, what would be the free cash flow in the next 5, 10, 15 years? We don't know. It's very unpredictable.

Again, optimists would say that it will keep going up because now it's doing so well. But pessimists would say, no, historically, it's been very cyclical. So, you know, it's going to start coming down again.

So which is correct? Honestly, no one knows because we can't predict the future. All we can do is we just look at the past consistency.

But the point is because of the inconsistency, we cannot use the discounted free cash [snorts] flow method because if you did, uh what would the intrinsic value be? Check it out.

The intrinsic value would be a crazy uh $317,000 per share.

That is the intrinsic value if you use this method and if you use the projections given by the consensus estimates by faxet where they are projecting that this company will grow 99% a year for the next 5 years and long run you'll grow 148% a year.

estimates by faxet where they are projecting that this company will grow 99% a year for the next 5 years and long run you'll grow 148% a year. I don't know about you but to me I think those projections are a bit too optimistic.

I don't know about you but to me I think those projections are a bit too optimistic. So for companies that have got very cyclical profits or very cyclical cash from operations uh what's a more appropriate valuation method to use?

Well, normally for these kind of companies we use a mean price to sales ratio method or a mean price to earnings ratio method.

So how is this method uh used or how is it calculated? Basically what we do is we take the 5-year average PE ratio. So we take the PE ratio uh we take the average of the last 5 years and then we multiply the ratio by the current earnings per share to get the intrinsic value.

Now if you don't want to do it manually it's all calculated for you over here the mean PE ratio without uh nonrecurring income.

So using this method taking the 5-year average PE multiplying by the current earnings per share that gives us a valuation of 556 uh which is what the Oracle value uses conservatively.

Hence you can see the oracle value uh is actually 5.56. If you're wondering where this comes from it is the mean price to earnings ratio without uh nonrecurring income.

However, if you think that Micron is no longer a cyclical business, that for the future the sales and profits will grow significantly, then you could use for example the price to sales growth ratio method.

And if you use this valuation method, you get the intrinsic value of $1, uh $16.

So that's the intrinsic value of Micron if you think that it would continue to grow significantly for the next 5 10 15 years. But again if you think that Micron will continue to be a cyclical company where the profits will drop once the uh supply of memory chips uh ease then Micron will be worth $556.

So that is what we call the valuation range. So you can see companies like Micron, you know, it could be worth $500, could be worth $1,000. So if it's worth $1,000, then at today's price, it is still undervalued.

But if you think it's worth $500, then at today's price is way overvalued. So these are companies that are very very I'm more uncertain. And hence, as a long-term investor, I tend to avoid companies like this because I'm not sure is it worth 500, is it worth 1,000?

I'm really not sure, but I can make money from it as a short-term trader using options.

So you can see companies like Micron, you know, it could be worth $500, could be worth $1,000. So if it's worth $1,000, then at today's price, it is still undervalued. But if you think it's worth $500, then at today's price is way overvalued.

So these are companies that are very very I'm more uncertain. And hence, as a long-term investor, I tend to avoid companies like this because I'm not sure is it worth 500, is it worth 1,000?

I'm really not sure, but I can make money from it as a short-term trader using options.

So, you can see that between the two, Oracle Value usually takes the more conservative valuation. Hence, it uses $500 instead of $1,000.