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Stock Market Reaction to Micron (MU) Earnings Was Positive, but Short-Lived; MKM Weighs In

support@smarteranalyst.com (Ben Mahaney)

It doesn't take much to send shares of Micron’s (MU) stock higher these days

Micron's release of second-quarter financials last week showed a significant decrease in key metrics, yet somehow the news pushed the stock nearly 10% higher. However, the stock has returned most of its profits as the broad market saw a substantial decline.

Though the company announced a drop in revenue and EPS (20.5% and 39.4%, respectively), the bad results weren’t as bad as Wall Street was expecting. This is mainly because most investors knew the chips market has deteriorated over the past few quarters, leading to a collapse in NAND and DRAM prices, and therefore Micron’s bottom line.

But Micron’s stock is up big so far in 2019, as many see the industry is turning around. MKM Partners analyst Ruben Roy sees it this way, too. The analyst reiterated a Buy rating on MU stock, while boosting his price target to $50 (from $44), suggesting the stock can rise about 24% upside from current levels. (To watch Roy's track record, click here)

Micron second-quarter financials included revenue of $5.8 billion (compared to $7.4 billion last year) and non-GAAP EPS of $1.71 (compared to $2.82 last year). Both of these metrics were above management guidance, though 50% gross margin was at the bottom of management’s 50%-53% guidance.

Roy say is is not surprising that Micron “noted its demand outlook for calendar 2019 has moderated, given greater than expected levels of customer inventory, weakening server demand at several enterprise OEM customers and worse-than-expected CPU shortages.” But while demand has been a challenge for Micron and others in the industry over the past few quarters, the company “expects DRAM bit shipments to begin increasing during its fiscal Q3 (August) with continued expectations for strengthening demand during the second half of the calendar year…”

As a result of “lower near-term DRAM prospects, MU plans to idle approximately 5 percent of its DRAM wafer starts.” Roy says, “management believes this will bring production levels closer to its view of DRAM industry bit demand growth for calendar 2019,” and help better control expenses.

On NAND, the analyst says, “Micron has been managing bit supply growth with adjustments to capital planning and wafer volumes. Management plans to reduce its total NAND wafer starts by approximately 5 percent, mostly through reductions on legacy nodes.” Roy views “the reduction in capacity as a positive for the company and as a cyclical bottom for the memory industry continues to take shape.”

All in all, Micron’s second-quarter numbers were expected, which is why there wasn’t such a harsh reaction by investors. In fact, many see this as good news and a step in the right direction. TipRanks analysis of 27 analyst ratings generally agree with this assessment. Analysis shows a Moderate Buy rating, with 16 analysts recommending Buy, nine saying Hold and two Selling. The average price target among these analysts stand at price target of $46.75, which implies nearly 15% upside potential. (See MU's price targets and analyst ratings on TipRanks)

 

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