Shares of chipmaker Micron (MU) have risen just 10% year to date, sharply underperforming both the broader tech sector and the 24% rise in the S&P 500 index. What’s more, the stock is up just 2% over the past six months, trailing the S&P 500’s 10.5% rise.
How well Micron is navigating through the recent global chip shortage remains a constant debate between the bulls and bears. If judging by the stock performance and concerns about supply chain disruption, the bears are winning that argument. But heading into its first quarter fiscal 2022 earnings results which are due out after the closing bell Monday, the company can give the bulls some leverage if it speaks positively about what’s to come for fiscal 2022.
Investors are still unsure about the demand prospects of memory chips, namely NAND and DRAM, which are used in various mobile devices such as smartphones as well as chips to power cloud computing, AI, and 5G. Management on Monday will need to speak positively about business prospects for these areas. Citigroup analyst Christopher Danely, who has an Outperform rating and $120 price target on the stock, expects Micron to do just that.
In a research note to investors last week, Danely said he expects demand for DRAM chips to rise in the first quarter of next year. "DRAM spot pricing has started to increase for the first time in six months due to the increased [customer] demand.” Given these factors, Danely also sees strong pricing improvements for DRAM throughout 2022 due to "higher demand and lower production.” On Monday Micron must issue the sort of guidance that supports this level of confidence for memory chips over the next several quarters.
For the quarter that ended August, the Boise, Idaho-based company is expected to earn $2.11 per share on revenue of $7.67 billion. This compares to the year-ago quarter when earnings came to 78 cents per share on revenue of $5.77 billion. For the full year, ending in October, earnings are projected to be $8.79 per share, up from $6.06 per share a year ago, while full-year revenue of $31.89 billion would rise 15.10% year over year.
The projected full-year year-over-year rise in Micron’s revenue and profits would ordinarily support a stronger-performing stock price. But Micron shares have gone in the opposite direction. What’s more, not only does Micron’s execution deserves applause, there is some evidence that the cyclical nature of the memory chip business have begun to wane. The company’s growing exposure to GPUs and other high-value chip products is a bullish signal for long-term tailwinds.
The company has topped consensus revenue and profit estimates in ten straight quarters. In Q4 not only did the company beat on both the top and bottom lines, revenue surged 36.62% year over year. And analyst forecast revenue will grow 32% for the just-ended quarter. Notably, DRAM, which is under a supply crunch, accounted for more than 70% of total revenue, which rose by double-digit percentage points year over year.
These metrics suggests Micron’s business is intact despite supply chain headwinds. Accordingly, now could be be a good time to bet on a long-term recovery. From current levels of around $83, Micron stock looks like strong value, assuming it can reach the $120 level. But for any of this to matter, on Monday Micron will need to issue guidance that firmly points to the confidence it has in the memory chip business, along with expanding profit margins.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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