Micron (MU) stock has been in a steady downtrend over the past year, falling some 30% in twelve months and down 40% year to date. The decline has been driven by a combination of factors. Aside from dealing with supply chain headwinds in a memory market that already highly volatile, the memory industry has been capitally intensive, posting commodity-like prices to match fluctuations in demand.
The decline has also lagged both the tech sector and its peer group within semiconductors. The semiconductor giant is set to report third quarter fiscal 2022 earnings results after the closing bell Thursday. Micron last week received multiple analyst downgrades stemming from concerns about the near-term direction for consumer demand. Micron’s headwinds have been compounded by the fact that the Federal Reserve have been raising interest rates.
While rising rate will serve to combat inflation, investors are worried of the effect of a recession, which could pressure demand for consumer PCs — a market that Micron relies on. Products for consumer devices accounts for 55% of Micron's revenue in 2021. As such, rising interest rates pose a significant risk to Micron's business. There is already evidence of declining demand for smartphones and PC sales. The latter declined 5% year-over-year in the Q1, according to market researcher IDC.
During the company’s investor day presentation in May, Micron management noted that consumer-focused segments of its business would drop by seventeen percentage points in the next three years. Meanwhile, the company expects its datacenter revenue to grow by twelve percentage points to 42%. While Micron is working to offset this risk by growing its datacenter business, the company on Thursday will need to issue strong guidance that instills confidence that memory pricing will remain solid until then.
For the quarter that ended May, the Boise, Idaho-based company is expected to earn $2.46 per share on revenue of $8.66 billion. This compares to the year-ago quarter when earnings came to $1.88 per share on revenue of $7.42 billion. For the full year, ending in August, earnings are projected to be $9.41 per share, up from $6.06 per share a year ago, while full-year revenue of $33.4 billion would rise 20.5% year-over-year.
The projected 20.5% and 55% rise in Micron’s full-year revenue and profits, respectively, suggests the stock has not been accurately judged. The company also has topped consensus revenue and profit estimates in eleven consecutive earnings reports, demonstrating a strong track record for execution. Micron's NAND segment, which has grown amid the rise in datacenter demand, remains under-appreciated. That segment’s growth rate of 26.2% is trending higher than the company’s four-year projected average.
Elsewhere, the company is also benefiting from next-generation DRAM technology, known as DDR5. This transition will drive higher average selling prices which will enable margin expansion and higher earnings per share. This was already noticeable in the second quarter when Micron reported EPS of $2.14 per share on revenue of $7.79 billion, topping analysts’ forecast on both metrics. Consensus expected EPS of $1.98 per share on $7.53 billion in revenue. Gross margins, a closely watched measure, came in at 47.2%.
During the quarter, Micron generated $3.63 billion in operating cash flow, above the $3.06 billion it generated in the year-ago quarter. The company continues to take steps to mitigate the supply chain issues. Micron also issued EPS and revenue forecast for the just-ended quarters above Street estimates. Despite the near-term pricing headwinds and supply chain struggles, Micron continues to execute and remains well-positioned longer term. On Thursday, it must guide in a manner that suggests this level of confidence.
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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