Can Micron (MU), which has delivered twelve straight earnings beats, prove its many doubters wrong?
Micron stock has been under significant pressure of late. Since the stock touched a 18-year high of $64.66 three months ago, the company has seen some 40% of its value wiped out, reaching $40 per share last week. During that span, the S&P 500 Index has risen by more than 5%, while the Nasdaq Composite Index has risen 2.5%.
The semiconductor giant is set to report fourth-quarter fiscal 2018 earnings after the closing bell Thursday. Not only has the flash memory specialist beaten earnings estimates in twelve straight quarters, Micron has topped the Street’s profit estimates by an average of 10% in the past five quarters. With that kind of execution track record, one would think Micron earning the Street’s trust would be a foregone conclusion. Not in this case.
According to some analyst, the trade war with China is one potential headwind investors are overlooking. Karl Ackerman, analyst at Cowen used the word “dreadful” to describe Micron’s soon-to-be reported quarter and its second half prospects. But despite the bearish sentiment, there are optimists such as Harlan Sur of J.P. Morgan, who sees “significant upside” to the shares. On Thursday the company must give investors reason to fully believe that the cyclical nature of the memory chip business, which has prompted several downgrades, is gone for good.
For the quarter that ended August, the Boise, Idaho-based company is expected to earn $3.33 per share on revenue of $8.25 billion. This compares to the year-ago quarter when earnings came to $2.02 per share on revenue of $6.14 billion. For the full year, earnings are projected to soar 137% year over year to $11.77 per share, while full-year revenue of $30.21 billion would rise 48.7% year over year.
The overall health of the memory-chip business, which in the past has been highly cyclical, has yet to convince some investors that this time it’s different. Analysts have signaled the peak of the cycle, despite confident guidance and assurances from the management about improving business conditions. The Street is targeting sales of DRAM, or dynamic random access memory, the type of memory commonly used in PCs and servers, to rise 46% to $5.92 billion.
Meanwhile, NAND chips — the type used in USB drives and digital cameras — are projected to rise 18% to $2.19 billion. And to say nothing about high-growth areas such as the datacenter, where it competes with the likes of (INTC), will also get tons of attention. Finally, the company’s strategic focus on enterprise customers, which has driven operating margin from 56% to 60%+ range, could bridge any gap suffered in the realm of memory.
All told, given that the stock is priced so cheaply at just four times fiscal 2019 estimates, against a forward P/E of 19 for the S&P 500 index, it would be a mistake to part with MU stock after this recent selloff.