Seth Klarman (Trades, Portfolio) is a legendary value investor who heads up the Baupost Group, an investment firm with around $25 billion in assets under management.
During the first quarter, the guru added to his positions in several stocks, entered three new positions and sold out of five holdings, including big tech names such as Meta Platforms Inc. (META, Financial) and Amazon.com Inc. (AMZN, Financial).
In this overview, I will break down the trades in Micron Technology Inc. (MU, Financial), which Klarman sold out of, and Seagate Technology Holdings PLC (STX, Financial), which he loaded up on.
Micron
Klarman sold all 3.28 million shares of DRAM chip manufacturer Micron (MU, Financial). The stock traded for an average price of $58.60 per share during the quarter. This is a timely trade given the Chinese government announced on May 22 that it has banned the sale of Micron’s products.
In April, I noted the Cyberspace Administration of China was reviewing Micron’s products and supply chain, which could result in a ban. After that, I proceeded to sell half of my position in the stock as a way to de-risk.
According to a statement directly from the CAC, Micron’s products have “relatively serious potential network security issues.” These apparently affect China’s “key information infrastructure supply chain” and “national security.” The statement then goes on to recommend “operators of critical information infrastructure should stop purchasing Micron products.”
What does this mean for investors?
Micron derives approximately 10% of its revenue from China. As a result, investors should expect a 10% haircut on revenue moving forward.
This has come at a tough time for Micron given the cyclical decline in the semiconductor industry, which has impacted revenue growth.
In a statement, a company spokesperson remained optimistic, saying, “We look forward to continuing to engage in discussions with Chinese authorities.”
I am personally not optimistic, however, (in the short term at least) given the U.S. commerce Department has said the ban has “no basis in fact.” Therefore, it looks as though this is likely not a technical ban, but a possible retaliation to the U.S. and its allies banning advanced chip sales to China, as it believes these will be used for military applications.
Examples includes U.S.-based Nvidia (NVDA, Financial), Advanced Micro Devices (AMD, Financial) and Applied Materials (AMAT, Financial), which were all banned from providing its latest artificial intelligence chips to China.
At the time, the Chinese regulator issued a statement labeling the bans as “discriminatory containment.”
A positive for Micron is it is expected to receive $1.5 billion in incentives from Japan (after meeting with its prime minister) to help bolster its production facilities in the country. This will include the use of state of the art ultraviolet technology for its chip manufacturing. This deal has been backed by the U.S. and is seen as a way to curb China’s power.
Cyclical financials
Micron generated tepid financial results for its second quarter of fiscal 2023. Its revenue declined by around 53% year over year to $3.69 billion.
This was mainly driven by the aforementioned cyclical decline in the Compute and Networking business, which saw its revenue plummet by over 60% year over year.
The silver lining is the semiconductor industry tends to be cyclical, so a bounce back is expected in the long term.
Another positive for Micron is the company is poised to benefit from incentives related to the U.S. CHIPS act, which aims to boost local semiconductor manufacturing. Over time, this should result in improved supply chain security, greater economies of scale and higher margins.
Further, the company reduced its expenses by around $80 million to $916 million as management slashed costs to compensate for the lower demand and chip prices.
Micron’s DRAM and NAND flash memory are essential components in computers and data centers. The company's management has said that an AI server can use up to 8 times as much DRAM and up to 3 times as much NAND compared to a traditional server.
Therefore, as the world becomes more technologically developed via trends such as AI and 5G, Micron is poised to benefit.
Valuation
Micron trades with a price-sales ratio of 3, which is slightly higher than its five-year average.
The GF Value Line also indicates a fair value of $50 per share based on historical ratios, past financial performance and future earnings projections, so the stock is classed as significantly overvalued at the time of writing.
Seagate
Klarman loaded up on 136,077 shares of Seagate (STX, Financial), which traded for an average price of $64 each during the quarter.
The company is a leading manufacturer of hard-disk drives, which is an essential part of PCs and data centers.
In the data storage market, Seagate competes with other major players such as Western Digital (WDC, Financial), Toshiba (TSE:6502, Financial), Samsung (XKRX:005930, Financial) and Intel (INTC, Financial). These companies offer a range of storage solutions, including hard-disk drives and solid-state drives.
According to an estimate by Statista, Seagate is the market leader in hard drives with 43% market share, closely followed by Western Digital with 37%. Together, the two players account for approximately 80% of all hard drive sales. The third-largest player is Toshiba, which has 20% market share.
Therefore, it looks as though the largest manufacturers could have a strong scale advantage, which should help to keep competitors at bay.
Financial headwinds
Seagate is facing financial headwinds it reported $1.86 billion in revenue for the first quarter, which missed analyst forecasts by $114 million and declined by 34% year over year.
A positive is Western Digital also reported a similar (36%) decline in revenue, which suggests a cyclical pullback as opposed to an individual issue.
It reported a loss of $2.09 per share, which missed expectations by $2 due to similar issues.
In response to these developments, management has announced a series of cost-cutting initiatives to “right size” its business for the new environment. This initiative includes a $150 million reduction in its cost structure and a further $200 million in savings is expected annually moving forward.
The company also has $772 million in cash and short-term investments and $5.9 billion in total debt, which is down 5% from the prior quarter.
Valuation
Seagate trades with a price-sales ratio of 1.55, which is fairly valued relative to historic levels.
The GF Value Line indicates an intrinsic value of $58 per share. Therefore, the stock is fairly valued by this estimate.
Final thoughts
Both Micron and Seagate are very strong semiconductor and computing parts manufacturers.
Micron is facing challenges from the China ban, which I believe will impact its stock price in the short term, along with the industry issues. However, I believe the company could be a solid play after the sell-off has occurred and its price has corrected down.
Seagate is another way to play the growth in technology. Given its valuation, it could be a strong long-term investment.
