Shares of Micron Technology MU have soared over 30% this year and jumped over 5% through late morning trading Friday. The memory chip maker’s 2019 comeback has easily outpaced the broader semiconductor market’s 18% climb and giants such as Intel INTC.
So, the question is: should investors think about buying Micron stock based on its positive momentum, in spite of headwinds and a rough near-term outlook?
Micron posted worse-than-expected results last quarter on the back of declining DRAM and NAND pricing, among other industry headwinds, including reduced demand from the likes of Apple AAPL. The Boise, Idaho-based firm’s chips are still vital components for personal computers, servers, smartphones, and more.
But semiconductors are historically cyclical and falling memory chip prices look poised to continue to hurt Micron. Nonetheless, Micron executives are optimistic about pricing going forward. “Although fiscal Q2 pricing came in below our expectations, we are optimistic that demand elasticity and seasonal trends will support improving demand growth in the second half of the calendar year,” CEO Sanjay Mehrotra said on the company’s earnings call.
Since the company reported its disappointing fiscal second-quarter earnings on March 20, some analysts have turned more optimistic. RBC Capital Markets analyst Mitch Steves slapped an “outperform” rating on MU stock, citing the possibility of rising chip prices. “We believe prices are continuing to come down and we will likely see a bottoming around the [second quarter/third quarter] time frame,” Steves wrote in a note to clients recently.
Meanwhile, Deutsche Bank analyst Sidney Ho remains confident in Micron despite the current market challenges. The analyst maintained his “buy” rating for Micron stock and provided a $48 a share price target. The MU price target marked over 22% upside compared to Micron’s closing price on Thursday of $39.34 per share.
As we mentioned at the top, shares of MU have already soared to start the year. This climb came along with the larger market and semiconductor comeback. In fact, shares of both Nvidia NVDA and Advanced Micro Devices AMD have climbed above Micron’s impressive 2019 run, while Western Digital WDC has roughly matched MU’s positivity. With that said, investors should note that Micron stock is still down 20% over the last 12 months, which could give the stock plenty of room to run.
Outlook & Earnings Trends
Looking ahead, it isn’t hard to see Micron returning to growth as memory chips seem set to remain in high demand over the long-run. Chips are key components in the larger technological revolution that includes data centers, cloud computing, artificial intelligence, and much more. With that said, Micron is beholden to cyclical demand that can dramatically impact quarterly results. Plus, oversupply hurts pricing power, which is currently part of Micron’s problem.
Industry headwinds appear ready to hurt MU’s top and bottom lines in the coming periods. Micron’s third quarter fiscal 2019 revenue is projected to fall 38.4% to $4.80 billion, based on current Zacks Consensus Estimate. Last quarter, Micron’s revenues dropped only 20.5%.
Meanwhile, the firm’s Q4 revenue is projected to tumble 41.5% to help drag its full-year sales down 22.7% to $23.51 billion. Peeking even further ahead, fiscal 2020’s revenue is projected to come in 8.2% lower than our current year estimate.
At the bottom end of the income statement, Micron’s outlook appears even worse. MU’s adjusted Q3 earnings are projected to drop 73% to $0.85 per share. Micron’s full-year EPS figure is expected to fall over 46%, with fiscal 2020’s earnings projected to sink 25% below our fiscal 2019 estimate. On top of all of this, at least some analysts have turned far more negative about Micron’s earnings picture.
Micron is currently a Zacks Rank #4 (Sell) based in large part on its recent earnings estimate revision activity. And despite some new high-profile analyst positivity, Micron’s second-half and fiscal 2020 outlook appear brutal. Plus, Micron’s valuation picture has become a bit stretched as its stock price soars, while its earnings estimates plummet.
MU is still trading at just 7.6X forward 12-month Zacks Consensus EPS estimates, which falls well below its industry’s 13X average and the S&P’s 16.7X. However, Micron has traded as low as 3.6X over the last year with a 12-month median of 4.8X
Therefore, some investors might want to hold off on Micron as a fair amount of the fundamentals suggest that it is still in a rough patch. But the stock has continued to surge as part of the larger market comeback. So, it is up to each investor to decide if they want to play MU’s current momentum or continue to stay on the sidelines until we see real signs of growth return.
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