Micron MU stock has lagged the tech sector during the market’s comeback from its March 23 lows. The DRAM and NAND memory chip giant still rests well off its highs even as the likes of Apple AAPL, Nvidia NVDA, and others hit new records.
With this in mind, let’s dive into Micron to see if investors might want to consider buying the stock ahead of its upcoming Q3 fiscal 2020 earnings release that’s due out on Monday, June 29.
What’s Going On?
Micron is one of the largest makers of DRAM and NAND memory chips. For a quick recap, DRAM chips are key components of PCs and servers, while NAND flash chips are crucial to smartphones and solid-state hard drives. MU has been hurt by pricing over the last year or so. In fact, its quarterly sales tumbled in trailing five periods.
Swings are, however, natural within the historically cyclical semiconductor space that is impacted by larger business spending cycles. Investors should note that Micron referred to its first quarter of fiscal 2020 as the “the cyclical bottom for our financial performance.”
That projection did seem to hold up, after Micron topped our Q2 earnings and revenue estimates, with sales down just 18%. This marked the smallest revenue decline during its rough stretch and a solid improvement from Q1’s 35% downturn and the fourth quarter of FY19’s 42% decline.
More recently, Micron in a May 27 regulatory filing upped its third quarter sales guidance to between $5.2 and $5.4 billion, up from $4.6 to $5.2 billion. The memory chip maker also raised its adjusted earnings outlook. This is a good sign since management had a far better understanding of how the coronavirus pandemic would impact their business and pricing for the period ended near the end of May.
The Boise, Idaho-headquartered firm indicated that it stands to benefit from the transition to 5G and more. Analysts at the time raced to up their guidance for Micron and some provided solid new price targets.
BMO Capital Markets analyst Ambrish Srivastava then on June 23 downgraded MU to market perform from outperform and lowered his price target to $55 from $60. The analyst pointed to signs of weakness in memory prices and deteriorating datacenter memory fundamentals.
Moving on, we can see that Micron stock has fallen behind the broader semiconductor market recently. That said, MU shares are still up 48% in the past 12 months against its industry’s 40% climb. In 2020, MU stock is still down 10% against the chip industry’s 9% comeback and our Zacks tech market’s 12% jump.
Despite its 40% climb since mid-March, Micron currently hovers at around $48 a share—end of regular trading Wednesday. MU rests roughly 22% below its 52-week highs after the Nasdaq hit new records Tuesday on the back of gains from Apple, Amazon AMZN, Microsoft MSFT, and more. This means that Micron could be due for a breakout if it's able to impress Wall Street.
In terms of valuation, MU trades right at its one-year median of 2.5X forward 12-month Zacks sales estimates. This marks a solid discount against its industry’s 3.9X average, its own 12-month highs of 3X, and Intel’s INTC 3.4X—despite far less growth potential.
Our current Zacks estimate calls for the MU’s third quarter sales to jump 11.1% from the year-ago period to hit $5.32 billion. This would see Micron end its sales decline, and its fourth quarter revenue is currently projected to jump another 11.5% to help trim its fiscal 2020 revenue downturn to just 11.3%, from FY19’s 23%.
Peeking further ahead, Micron’s fiscal 2021 revenue is set to jump 11.4% above our current year estimate. Meanwhile, its adjusted Q3 earnings are still expected to decline by 26% to come in at $0.78 per share. Luckily, MU is expected to return to earnings growth in the fourth quarter, with its EPS figure set to pop 34%.
We can also see that Micron’s near-term and fiscal 2020 earnings estimates have surged in the last 30 days. But it’s worth noting that its FY21 consensus estimate is down 2.9%.
Micron’s overall earnings revision positivity helps it grab a Zacks Rank #2 (Buy) at the moment, alongside its “A” grades for Value and Momentum in our Style Scores system. Some investors might want to take a chance on MU stock for a possible post-earnings jump, but that’s always risky, especially given the broader uncertainty.
Those with a longer-term investment horizon might want to consider Micron as a bet on the memory chip market that appears to be undervalued and still rests 20% below its 52-week highs.
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