The improved prospects for memory chips have driven a rebound in Micron (MU) stock, which has risen some 17% over the past six months, compared to an 8% rise in the S&P 500 index. The shares are up 38% year to date, besting the 12.5% rise in the S&P 500 index.
Micron’s stock performance has placed the memory semiconductor specialist among one of the better names to own not only in its semiconductor peer group, but also in overall technology. Ahead of its fourth quarter fiscal 2023 earnings results which are due after Wednesday's closing bell, investors are eager to learn whether the company can sustain the momentum the stock has shown into the next quarter. Mizuho Securities analyst Vijay Rakesh believes that’s precisely what will happen.
Citing sustained strength in pricing and ongoing inventory improvements, Rakesh, who has a Buy rating on the stock, raised his price target to $82 from $72. The analyst noted that inventories should decline into the end of the year, while dynamic random access memory and NAND are "starting to improve.” In looking out to the next fiscal year, Rakesh expects Micron will ramp up production of high-bandwidth memory next year, which will produce "strong share gains," which should set the company up for a better year next year.
This explains why the stock has done so well in recent months. Its management, meanwhile, has made the best of the bad situation by trimming operating expenses to maintain margins and preserve the company’s balance sheet. These cost cuts have helped Micron achieve its profitability goals as it waits for demand and price stability to return. On Wednesday these are among the topics the company will need to discuss, along with issuing positive guidance that instill confidence that memory pricing can rebound in the quarters ahead.
For the quarter that ended August, the Boise, Idaho-based company is expected to lose $1.18 per share on revenue of $3.91 billion. This compares to the year-ago quarter when earnings came to $1.45 per share on revenue of $6.64 billion. For the full year, the company is projected to lose $4.55 per share, reversing a year-ago profit of $8.35 per share a year ago, while full-year revenue of $15.45 billion would decline 49.8% year over year.
The projected full-year decline in Micron’s revenue and profits underscore the cyclical nature of Micron’s memory chip business. Despite the projected declines, the market appears nonetheless encouraged by the prospects of improved memory chip demand. What’s more, there are data points suggesting a rebound in smartphone and PC chips could be imminent. When assessing Micron’s strong stock performance, the euphoria surrounding the potential of generative AI can’t be ignored.
The implications of generative AI is a positive for sure. The main catalyst, however, is the optimism that the memory supply chain is expected to bottom out as 2023 nears its end, which will lead into a cyclical recovery in early 2024. Inventories are also expected to decline as a result of supply cutbacks. In the third quarter, Micron reported revenue of $3.75 billion, which as down 56.58% year over year, bearing Street estimates by $75 million.
The company generated $1.389 billion from its Compute and Networking unit, while Embedded accounted for $912 million in revenue. Mobile and Storage accounted for $819 million and $627 million, respectively. Q3 adjusted loss of $1.43 also beat estimates by 14 cents. The company’s Q3 adjusted gross margin was 16.1%, well above the negative 21.1% that investors were anticipating.
On Wednesday investors will see if the company can improve on these numbers. Aside from a top and bottom line beat, the company will also need to provide positive guidance that instills investors confidence that memory pricing can rebound in the quarters ahead.
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