Micron Stock Up on Impressive Earnings, Chip Outlook

Micron Technology (MU) reported impressive fiscal 2020 first-quarter earnings results (for the period that ended on November 28) on December 18 after the market bell. The chip giant posted better-than-expected earnings and revenue in the quarter. However, it gave a lower-than-expected outlook for the second quarter. Nevertheless, investors seemed optimistic about the company’s recovery amid expectations of favorable chip demand ahead.

Micron stock gained as much as 4.62% in extended trading on the day after delivering better-than-expected first-quarter results. The stock is also trending upward in premarket trading today and is up 3.68%. Shares of Western Digital (WDC) and Nvidia (NVDA) also shot up after Micron’s earnings release. The two chip makers rose nearly 3% and 1%, respectively, in extended trading on the day. Moreover, Nvidia stock reached a YTD (year-to-date) high of $231.94 per share midday on December 18.

Micron stock closed marginally up by 0.08% at $53.04 on Wednesday. At this closing price, its market cap stood at $58.8 billion. The stock is trading 2.3% below the 52-week high of $54.30 it attained on December 16. It’s trading 86.8% higher than its 52-week low of $28.39. On a YTD basis, Micron has gained around 67.2%. In comparison, the S&P 500 and the VanEck Vectors Semiconductor ETF (SMH) have surged about 27.3% and 61.9%, respectively, YTD. We believe Micron stock could rally in the near term on a favorable memory chip scenario ahead.

Micron reported adjusted EPS of $0.48 in the first quarter, which beat Wall Street’s estimate of $0.47. However, its EPS fell 83.8% YoY (year-over-year) from $2.97 in the previous year’s period. Its EPS were also down 14.3% from the preceding quarter. Micron’s earnings have been declining on a sequential basis for the past five straight quarters.

A YoY decline in its top line and weakness in its gross and operating margins led to a drop in its earnings. Its gross margin contracted from 59% in the first quarter of fiscal 2019 and 30.6% in the fourth quarter of fiscal 2019 to 27.3% in the first quarter of fiscal 2020. It also lagged analysts’ estimate of 27.4% in the quarter. Its operating margin contracted to 11.5% in the first quarter of fiscal 2020 from 14.3% in the fourth quarter of fiscal 2019 and 49.1% in the first quarter of fiscal 2019.

Share buybacks, however, supported the company’s earnings in the reported quarter. The company repurchased around 1 million shares and returned approximately $50 million to its shareholders in the period.

The company’s revenue of $5.14 billion exceeded analysts’ estimate of $5.01 billion in the first quarter and landed within its guidance. Its revenue dropped 34.9% YoY but improved 5.6% from the preceding quarter. Its revenues have been growing sequentially for the past two quarters amid optimism about chip demand recovery.

Demand for DRAM (dynamic random-access memory) and NAND (negative-AND) chips dropped off last year. Lower chip demand was the result of ongoing US-China trade war fears and a downturn in the semiconductor cycle. Falling demand for chips from the server market and smartphone companies also added to the issue. Meanwhile, demand started reviving in the fourth quarter of fiscal 2019 as inventories improved rapidly.

Micron expects its second-quarter earnings results to lag Wall Street’s estimates. However, Micron CEO Sanjay Mehrotra stated during the company’s earnings call that the quarter would be the “cyclical bottom for our performance.” Management expects the memory chip industry to rebound soon.

For the second quarter, the company expects its adjusted EPS to be $0.35 (plus or minus $0.06), down from the preceding quarter. Analysts expect EPS of $0.39 in the second quarter, in line with the company’s guidance. Meanwhile, Micron expects revenue in the range of $4.5 billion–$4.8 billion for the second quarter. Its second-quarter revenue fell from the previous year’s quarter and the preceding quarter. Analysts expect revenue of $4.72 billion, which is within the company’s guidance range. For the second quarter, Micron expects its gross margin to be 27% (plus or minus 1.5%). Further, the company expects better demand conditions in 2020.

On Wednesday, Micron confirmed in an interview, as reported by Bloomberg, that it had received Huawei licenses for trading. Mehrotra stated that the company had “received all of the requested licenses that enable us to provide support for certain products” to Huawei for their mobile and server businesses. However, the company also mentioned that it didn’t foresee “a material impact on our revenue for the next couple of quarters.”

The news could drive the stock higher, as chip stocks such as Micron have been extremely sensitive to the trade war. The recent development related to the US and China reaching Phase 1 of a trade deal is also favorable for semiconductor players.

Micron had been one of the largest chip suppliers of Chinese telecommunications giant Huawei. However, Micron had to stop trading with Huawei amid the trading ban imposed by US President Donald Trump due to the trade war. The export restriction to Huawei significantly dented Micron’s sales. Huawei contributed around 13% of Micron’s sales in the first half of fiscal 2019.

Overall, analysts favor “buy” ratings on Micron, as 25 out of 37 analysts have given it “buy” ratings. As of December 18, only nine analysts have given it “hold” ratings. Three analysts have given it “sell” ratings. Currently, analysts have given it a 12-month target price of $61.71. On December 13, the stock was trading at a discount of 14% to analysts’ 12-month target price. Its median target price is $65.00 as of the same date.

After its first-quarter results, many companies, including Deutsche Bank, Mizuho, Wells Fargo, Citigroup, Instinet, Cowen, and RBC Capital, lifted their price targets on Micron. In fact, several analysts turned bullish on the stock even before its first-quarter earnings release on improving memory demand.