Investors shouldn’t be too surprised with Micron (NASDAQ:MU) earnings on Wednesday after the bell. While MU stock has moved much higher from its Christmas Eve low, the business remains tied to memory pricing which continues to suffer from last year’s chip glut.
Although news from the report could temporarily affect Micron shares, investors should expect little change. MU stock has gained almost 25% this year, outpacing the Nasdaq Composite index‘s 16.2% increase.
Expect Lower Revenue and Earnings
Analyst forecast earnings for Micron’s second quarter of fiscal 2019 will come in at $1.70 per share. If this number holds, it will be a substantial reduction in profits from the same quarter last year when the company reported $2.82 per share. The U.S.-China trade war and the crypto craze fizzle-out has significantly reduced demand for memory chips. Investors will see the impact of lower demand in Micron’s sales. Wall Street believes the company will show revenue that’s 20.2% lower than last year, at $5.87 billion versus the year-ago’s $7.35 billion.
As Micron has reported earnings beats in each of the last four quarters, I see little reason to expect a miss. However, quarterly estimates have continued to fall. Analysts had expected $2.44 per share only 90 days ago. For this reason, one has to question if beating significantly reduced expectations will help and, if so, by how much.
The Worst is Probably Over for MU
For most of its history, the prospects for Micron stock rose and fell on memory chip pricing. The earnings and revenue predictions show the long-time trend will likely continue. Most MU stock investors have acclimated to lower earnings.
MU stock valuation already reflects this “worst is over” sentiment. Like its chip-stock peers — including as Intel (NASDAQ:INTC), AMD (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) — the Micron stock price cratered and then saw a dramatic recovery late last year. In MU’s case, the shares have gained almost 40% since December lows.
Even after this massive surge, Micron stock will appear cheap to many investors. The price-to-earnings (PE) ratio stands at a meager 3.3 times earnings. Even after figuring in the reduced profits, the forward PE rises to just under 6.5x. This comes in well below the longer-term average multiple of 13.5x.
Moreover, while I usually cringe when I hear the expression “it’s different this time,” I think one thing is truly different. During previous chip gluts, Micron stock fell into losses, sometimes taking MU below $10 per share. While analysts forecast lower profits through at least 2021, they do expect Micron to remain profitable.
Why? Today’s new technologies have sent demand for memory chips exponentially higher. While I expect business cycles to remain a fact of technology life, I think the heightened demand will keep Micron profitable in leaner times ahead. It should also keep Micron stock from falling below the 52-week low of $28.39 per share.
However, despite this change, MU stock remains tied to the memory prices that have always driven its highs and lows. Unfortunately for MU, pricing continues to look unfavorable for both the DRAM and NAND memory on which Micron depends.
Stay Focused on Memory Pricing
Investors should remain mindful of management’s job to act as positively as possible. Hence, they may focus on other news. On a recent call, CEO Sanjay Mehrotra reported production cost reductions that “outpace the industry.” While that can modestly help earnings, investors should avoid becoming distracted by such news.
As a child playing football, I learned that I would need to pay attention to the player’s waist instead of other movements to make a successful tackle. To tackle Micron stock, investors should likewise watch its “waist” — that is, memory prices. News on production costs, while significant, distract from the true picture. For this reason, any possible bump that can come from Q2 earnings will probably prove temporary. While I would not expect additional bad news, I think the pain will continue for Micron.
The Bottom Line on Micron Stock
Micron stock will continue to move based on memory pricing, not quarterly reports. MU usually beats earnings, and I do not see any indications that that trend will change in this quarter. However, this comes off of estimates that have fallen continually for months. Unfortunately, the memory pricing trends remain on track to keep Micron’s profits falling through at least 2021.
MU stock will see a few bright spots. Thanks to much higher demand, lows in the memory price cycle could keep Micron profitable in leaner times. Moreover, the company’s reduced production costs can also offer help.
Still, none of this changes MU’s tendency to rise and fall with memory prices. Until market demand drives these prices for memory higher, lower production costs and rock-bottom PE ratios will do little for Micron stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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