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Micron Stock Fell on Disappointing Guidance

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Micron Technology (MU) reported upbeat fourth-quarter fiscal 2019 results on September 26 after the market closed. The company posted better-than-expected earnings and revenue in the quarter. However, investors were disappointed by its weak first-quarter guidance. Micron stock fell 1.76% to $48.60 on the day. At this closing price, its market cap stood at $53.6 billion. After it reported its earnings, its stock slipped as much as 7.75% in extended trading on September 26.

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Micron’s fourth-quarter earnings

Micron reported EPS of $0.56 in the fourth quarter, which beat analysts’ consensus estimate of $0.49. However, its EPS fell 84.1% YoY (year-over-year) and 46.7% sequentially. A significant contraction in its gross and operating margins, along with weaker revenue, led to a drop in its earnings. Share buybacks, however, supported its earnings in the quarter. The company returned $2.7 billion to its shareholders under its $10 billion share repurchase program in fiscal 2019.

The company’s fourth-quarter revenue of $4.87 billion exceeded analysts’ estimate of $4.57 billion. Its revenue fell 39% YoY but rose a marginal 1.7% from the previous quarter amid a recovery in memory chip demand. DRAM (dynamic random-access memory) and NAND (negative-AND) demand revived in the fourth quarter as inventories improved rapidly. Bit shipments increased for both DRAM and NAND chips in the quarter. However, average selling prices continued to plunge for both DRAM and NAND chips.

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Lowered earnings guidance

Despite upbeat fourth-quarter results, Micron has provided mixed fiscal 2020 first-quarter guidance and expects a disappointing holiday season. The company expects fiscal 2020 first-quarter adjusted EPS in the range of $0.39–$0.52, lower than analysts’ estimate of $0.47. Meanwhile, it expects revenue in the range of $4.8 billion–$5.2 billion in the first quarter. Analysts expect revenue of $4.95 billion, which is within the company’s guidance range. Contracting gross margins caused by lower memory prices have pressurized Micron’s earnings guidance. For the first quarter, it expects its gross margin to be in the range of 25%–28%, down from 30.6% in the fourth quarter.

In the second half of 2019, Micron expects DRAM and NAND demand to improve from the first half. However, this improved demand likely won’t lead to price recovery. The company expects better demand conditions in 2020.

Uncertainty surrounding Micron stock

Micron continued to suffer from trade war uncertainty in the fourth quarter of fiscal 2019. Chinese tech giant Huawei contributed around 13% of Micron’s sales in the first half. Micron stated that its sales to Huawei fell significantly due to the trade ban, which dented Micron’s sales in the fourth quarter. If the trade ban on US companies with Huawei continues, it will result in more significant declines in Micron. The company, along with many chip makers, has urged the US Department of Commerce to grant a license to trade with Huawei. Like Micron’s earnings, last month, Marvell’s (MRVL) earnings results were dented by the Huawei trade ban.

After Micron’s weak earnings forecast, NAND flash memory rival Western Digital (WDC) also slipped over 2% yesterday. Shares of chip equipment makers Applied Materials (AMAT), KLA Corporation (KLAC), and Lam Research (LRCX) also fell due to lower sales to memory makers amid an industry downturn.

Analysts’ recommendations

Recently, several analysts have provided optimistic views on Micron stock amid a favorable memory market environment. Amid a recovery in memory chip demand, Micron stock has generated stellar returns this year. Micron stock has rallied around 53.2% in the period.

Bullish analysts have thus put Micron’s 12-month target price at $53.62, a 10.3% premium to its price of $48.60 on September 26. Meanwhile, around 20 analysts have given it “buy” ratings out the 34 analysts covering its stock. Eleven analysts have “hold” ratings on Micron, while three have “sell” ratings on its stock.

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