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Micron Poised to Report Great Results, but the Outlook Matters More

Timothy Green, The Motley Fool

Memory chip manufacturer Micron Technology (NASDAQ: MU) will report its fiscal fourth-quarter results today after the market closes. The stock has been hammered in recent months as concerns about memory oversupply began to proliferate. The company should still produce near-record results for the fourth quarter, but earnings could start to fall next year if memory chip prices don't hold up.

What happened last time

While average selling prices for Micron's NAND chips dipped in the third quarter, DRAM prices rose by more than 30% year over year. This strong DRAM pricing along with double-digit sales volume growth for both types of memory chips helped Micron surpass analyst expectations.

Metric

Q3 2018

Year-Over-Year Change

Compared to Average Analyst Estimate 

Revenue

$7.80 billion

40%

Beat by $50 million

Non-GAAP earnings per share

$3.15

94.4%

Beat by $0.03

Data source: Micron.

A Micron solid-state drive.

Image source: Micron.

What analysts are expecting

For Micron's fiscal fourth quarter, analysts are expecting Micron's robust growth to continue:

Metric

Average Analyst Estimate

Year-Over-Year Change

Revenue

$8.25 billion

34.4%

Non-GAAP earnings per share

$3.34

65.3%

Data source: Yahoo! Finance.

A slew of downgrades

While analysts are optimistic about Micron's fourth quarter, many have started to slash their price targets on the stock due to fears of memory chip oversupply. Micron has already started to feel NAND price declines, and DRAM price declines could be in the cards for 2019. Micron stock has tumbled around 25% from its recent high, in part due to these analyst downgrades:

  • Aug. 9: Morgan Stanley lowered its rating on the entire semiconductor industry to cautious. MS is worried about rising chip-inventory levels and signs of the market overheating.
  • Aug. 15: Wells Fargo maintains an outperform rating on Micron stock, but lowered its price target from $70 to $63. The bank is still optimistic, though, and analyst Aaron Rakers believes the valuation is attractive.
  • Sept. 6: Baird removed Micron as a top semiconductor large-cap idea while slashing its price target from $100 to $75. Baird analyst Tristan Gerra pointed to NAND oversupply, peaking gross margins, and the prospect of DRAM price declines in 2019.
  • Sept. 11: RBC Capital dropped its price target on Micron stock from $83 to $70 in anticipation of headwinds from the memory cycle. Analyst Amit Daryanani expects DRAM prices to weaken next year.
  • Sept. 12: Goldman Sachs knocked down its rating on Micron stock from buy to neutral. Analyst Mark Delaney sees weakness in NAND and DRAM fundamentals, and he points out that downturns are often worse than investors initially expect.
  • Sept. 14: Macquarie lowered its Micron price target from $80 to $70.
  • Sept. 17: Deutsche Bank dropped its Micron price target from $80 to $60 but reiterated a buy rating. The bank lowered its 2019 estimates to factor in weaker prices for NAND and DRAM chips. Deutsche now predicts earnings per share in 2019 will be 20% lower than previously expected.
  • Sept. 17: BMO Capital Markets reiterated a market perform rating but lowered its Micron price target to just $45. Analyst Ambrish Srivastava expects downward estimate revisions to continue as DRAM pricing weakens.

Not everyone became more negative on Micron in the past few months. Analysts at Bank of America Merrill Lynch kept its $100 price target on the stock after recent positive meetings with Micron's rivals and equipment vendors. And hedge fund manager David Tepper said he remains "very, very long" Micron on CNBC, citing strong long-term demand trends.

While there's no consensus on how bad the next downturn in memory chip prices will be, analysts are starting to line up behind the view that Micron will have a tougher time next year.

The outlook is key

Micron will very likely come up with impressive fourth-quarter numbers, but investors should pay more attention to what the company says about fiscal 2019. Micron was overly optimistic prior to the last downturn in 2016, saying at the end of 2015 that supply and demand was expected to remain balanced the following year. That turned out to be completely wrong.

Micron is again optimistic today, announcing a massive $10 billion buyback earlier this year at what could be the peak of this memory chip cycle. If Micron starts to soften its language around 2019 expectations, that would be a sign the company is seeing the same issues that most analysts are now seeing.

With Micron shares down so much over the past few months, the stock could swing wildly if Micron's outlook either misses or beats expectations. While the stock looks extremely cheap based on current earnings, investors shouldn't discount the possibility of a steep earnings decline next year.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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