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Micron Earnings: Is Memory Price Recovery Ahead?

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Micron Technology (MU) is set to report its fiscal 2020 first-quarter earnings results (for the period that ended in November) after the closing bell on December 18. Analysts expect Micron to report EPS of $0.47 on revenue of $5.01 billion. The company has made positive earnings revisions for the quarter in the last seven days. These positive revisions signal that its earnings should beat Wall Street analysts’ estimates in the quarter.

Micron’s first-quarter earnings expectations

During the fourth quarter, the chip giant provided a first-quarter EPS outlook in the range of $0.39–$0.52. It also expects revenue of $4.8 billion–$5.2 billion for the quarter. It expects to post a gross margin in the range of 25%–28%, down from 30.6% in the fourth quarter of fiscal 2019.

Micron expects 2.7% sequential revenue growth in the first quarter but expects its earnings to fall 18%. Wall Street analysts expect Micron’s first-quarter earnings to fall 84.1% YoY (year-over-year) and 16.1% sequentially. Analysts also expect the company’s revenue to drop 36.7% YoY in the quarter. However, they also expect its revenue to rise around 2.9% from the fourth quarter of fiscal 2019.

Wall Street analysts expect Micron’s revenue to fall 12.2% YoY to $20.6 billion in fiscal 2020. However, they expect it to improve by 22.8% YoY in fiscal 2021—a big jump! Analysts also expect the company’s fiscal 2020 EPS to fall by around 61.7% to $2.43. They expect its EPS to see growth of over 100% to $5.46 in fiscal 2021.

Factors affecting Micron’s first-quarter earnings results

Micron manufactures DRAM (dynamic random-access memory) and NAND (negative-AND) memory chips. In the fourth quarter of fiscal 2019, its revenue of $4.87 billion reflected a fall of 39% YoY. Meanwhile, its revenue rose 1.7% from the previous quarter amid a recovery in memory chip demand. Micron’s fourth-quarter EPS of $0.56 also fell 84.1% YoY and 46.7% sequentially. Its earnings declined due to significant contractions in its gross and operating margins, along with lower revenue.

Lower memory prices led to contractions in the company’s gross and operating margins. Average selling prices declined for both its DRAM and NAND chips. In the fourth quarter, Micron’s NAND selling price plunged 8% sequentially, and its average DRAM selling price fell 20% sequentially. Meanwhile, DRAM and NAND demand and prices improved from the previous quarter. The company continued to utilize its excessive chip inventory, which helped improve prices. Bit shipments increased for both DRAM and NAND chips in the quarter. The company also expects to see improvement in demand for DRAM and NAND memory chips in the first quarter.

Micron has also been regularly repurchasing shares, which has benefited its earnings. It repurchased $2.7 billion worth of shares under its $10 billion share repurchase program in fiscal 2019. We continue to expect Micron to repurchase shares in the first quarter of 2020, boosting its earnings growth.

Analysts are optimistic on Micron ahead of its first-quarter earnings release

Just before its fiscal 2020 first-quarter earnings release, several analysts have become bullish on Micron stock amid a favorable memory market environment. According to a Bloomberg report, those semiconductor companies that focus on memory chips should rally in the near term on a rebound in demand.

Susquehanna raised its price target and rating on MU on December 16. Analyst Mehdi Hosseini upgraded Micron to “positive” from “neutral.” Hosseini also lifted the stock’s price target to $85 from $45. The analyst expects a recovery in both DRAM and NAND memory chip prices in 2020 and 2021. Along with Micron, Susquehanna also upgraded chip giant Western Digital (WDC) on expectations of a revival in flash memory prices.

On December 16, Morgan Stanley’s Joseph Moore raised his price target on MU to $56 from $48, citing memory trends. According to The Fly, Moore told clients that the recent strength in memory chips was “surprising.” He expects the momentum to sustain for a “quarter or two.”

Just a day ahead of the company’s first-quarter earnings results, many analysts have upgraded its stock, according to MarketWatch. On December 17, Wedbush analyst Matt Bryson upgraded Micron to “outperform” from “neutral,” citing improving memory dynamics and DRAM pricing. Wedbush also raised its price target on MU to $65 from $44. Like Wedbush, several other analysts, including Needham and RBC Capital, have turned optimistic on Micron. Needham analyst Rajvindra Gill expects a recovery in memory prices in 2020. Needham raised its price target to $70 from $60 with a “buy” rating, reported MarketWatch.

Analysts’ recommendations

Bullish analysts have thus put Micron’s 12-month price target at $57.67, an 8.9% premium to its price of $52.94 on December 16. Out of the 37 analysts covering Micron stock, around 25 have given it “buy” ratings. Nine analysts have “hold” ratings on Micron, while three have “sell” ratings on the stock.

Micron stock has picked up momentum on improving memory trends. The US and China have also reached Phase 1 of their trade deal, increasing investor optimism around chip makers such as Micron. Its stock rose 3.4% higher to $52.94 on December 16. It was trading 2.5% below its 52-week high of $54.30 and 86.5% higher than its 52-week low of $28.39. At its closing price yesterday, Micron’s market cap stood at $59 billion. Year-to-date, Micron has gained around 66.9%.

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