The boom-and-bust cycle of the memory market has sent Micron (MU) stock cratering as much as 56% from its 52-week high of $64.
Semiconductor overcapacity and lowered demand has impacted Micron’s pricing power and profit margins. As such, analysts have had little choice but to reduce their projections for Micron’s earnings and revenue in the coming quarters. And we will see just how accurate these lowered estimates are. The nation’s largest memory manufacturer is set to report second quarter fiscal 2019 earnings after the closing bell Wednesday.
While the lowered bar should help the company meet or beat its estimates, that might not be enough to change negative sentiment about the health of the memory chip market. Softening DRAM prices have chipped away at Micron’s business, though Micron management, which has steered the company towards twelve straight earnings beats, has downplayed the issue, expressing confidence the company can overcome the cycle.
On Wednesday the company must give investors reason to fully believe that the cyclical nature of the memory chip business — the type that stores information in mobile devices and helps processors crunch data in computers and data centers — won’t impact its long-term prospects. The company must also demonstrate signs of a turnaround by guiding in a way that suggests confidence about what investors should expect in the second half of 2019.
For the quarter that ended February, the Boise, Idaho-based company is expected to earn $1.70 per share on revenue of $5.89 billion. This compares to the year-ago quarter when earnings came to $2.82 per share on revenue of $7.35 billion. For the full year, ending August, earnings are projected to be $7.36 per share, down from $11.95 per share a year ago, while full-year revenue of $24.89 billion would decline 18% year over year.
The expected year-over-year decline on both the top and bottom lines have been the major reason for the stock’s punishment. But beyond the headline numbers, all eyes will be on Micron’s forecast for the current quarter and the full fiscal year. Micron CEO Sanjay Mehrotra was optimistic about the state of DRAM prices, saying in October that the supply and demand imbalance should last only a quarter or two.
Micron stock reacted favorably to those statements, climbing some 16% since the company’s last earnings report. The Street, however, will want some sign from Micron on Wednesday to support Mehrotra’s optimism that DRAM prices will, in fact, bounce back at some point this year. For Q3, which ends in May, the Street forecasts EPS of $1.26 per share on revenue of $5.42 billion.
It remains to be seen whether Micron will guide to meet those estimates or do so in a way to suggest the memory cycle needs more time. From my vantage point, it seems much of the investment risk is now priced into the stock, which trades at just five times forward estimates, compared to a P/E of 18 for the S&P 500 index, making Micron a compelling play for the next 12 to 18 months.