Micron (MU) Earnings Creates Long-Term Opportunity

Sometimes when companies report earnings outside of the recognized “earnings season,” they may see an exaggerated response in their stock regardless of the direction of the move, simply because more eyes are focused on their report than would be the case if a dozen or so other companies were releasing on the same day. That would seem to be what is happening with Micron Technology (MU), which reported results for their fiscal Q4 2023 after the bell yesterday, and the resulting drop in the stock’s price takes it to a tempting entry point, even for someone like me who is a bit bearish against the markets overall right now.

The earnings were, shall we say, mixed. They beat on the bottom line, but only in the sense that they lost less than anticipated, and exceeded expectations on revenue guidance, while disappointing on guidance for EPS. The net result, as far as post- and pre-market traders were concerned, was a big negative, with MU doing this after the release:

I get that. When a company lowers EPS guidance, a stock almost always drops, no matter what they report for the previous quarter or what they may say about the future beyond the period that the guidance covers. In this case, though, the case for owning the stock is not about short-term prospects at all. Quarter to quarter earnings for any company in the memory business is extremely volatile because their end product is a commodity, which is traded in a market that is itself volatile.

Just like any commodity, the relationship between price, supply, and demand in memory is complex, but predictable. When demand is high, prices increase, and suppliers ramp up production to take advantage. Then, once supply catches up, any drop in demand results in a glut, and prices drop sharply. That is what happened with chips last year, and MU’s price reflected that cycle. Then the opposite happens. Lower prices encourage demand, just as suppliers are cutting back. That is where we are right now. And when the AI boom is added in, it is fair to assume that before too long we will be back to short supply and rising prices.

Back in April, I laid out the long-term case for MU, which I saw as a “picks and shovels” play on that AI boom. “Picks and shovels” is an investing strategy that recognizes that in the early stages of any boom, picking the eventual winner is difficult if not impossible, but companies that supply everyone trying to hit the mother lode, like those that supplied gold prospectors with the equipment they needed, make money regardless of who strikes gold. Micron, I argued, as a supplier of chips, could benefit from seemingly every tech company chasing AI money no matter who ends up getting the biggest slice of the pie.

The only problem with that is that as they dealt with the dynamics of memory pricing, Micron didn’t make much progress in supplying that market. However, that is changing, and in the that followed the release, Micron CEO Sanjay Mehrotra revealed that they are in the process of negotiating a deal to supply Nvidia (NVDA), the current darling of AI investors. Their high bandwidth memory (HBM) chip, he said, is not yet generating revenue, but is being well received by customers who see it as performing well with relatively low energy usage, and can be expected to be accretive by early next year,

Given the current bearish mood of the market, traders are focusing on the bad short-term news to such an extent that MU has dropped to what looks like a good entry point for longer-term investors. In that April piece, I pointed out that MU has always been quite volatile within a range, but that that range seemed to be moving higher. That has continued since, with the stock trading in a quite clearly defined, upward sloping channel. This drop takes it to the bottom of that channel at around $65 at the time of writing.

There is, of course, no guarantee that that support level will hold. In fact, given that interest rates are likely to remain “higher for longer,” chances are that MU will trade lower at some point before too long. However, if you are looking for a long-term AI play, this is a good point at which to start averaging into MU. Or if, like me, you have already started to do that, to continue to do so.

* In case you hadn’t worked it out, the author currently owns MU and intends to buy more at these levels

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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