Q2 earnings expectations
During the first quarter, Micron expected its second-quarter revenues to fall on a YoY (year-over-year) basis to $4.5 billion–$4.8 billion. Analysts expect Micron to report revenue of $4.69 billion—down 19.7% YoY. Micron also expects to report a gross margin of 25.5%–28.5%. Analysts expect a gross margin of 27.03% in the second quarter. The company also had a second-quarter adjusted EPS outlook of $0.39–$0.41. Analysts expect an EPS of $0.37 for the second quarter—a decline of 78.6% YoY.
Wall Street analysts expect Micron’s revenue to continue to fall in fiscal 2020. They expect a decline of 13.6% YoY to $20.2 billion in fiscal 2020. However, they expect the revenue to improve by 22.3% YoY in fiscal 2021. Analysts also expect Micron’s fiscal 2020 EPS to fall by around 64.7% to $2.24. They predict that the company’s EPS will grow over 100% to $5.25 in fiscal 2021.
Factors impacting Micron’s Q2 earnings results
Notably, Micron has high exposure in China, which has been under lockdown since late January due to the coronavirus outbreak. The company took measures to reduce the coronavirus risk. Last week, Micron’s CEO told its shareholders that the company took precautions against the deadly coronavirus in January. Micron said that it has enough raw materials. The company managed its supply chain to keep up the production and manufacturing capabilities.
Besides, Micron should benefit from the chip shipments to its key customer Huawei in early January. I think that the company should benefit from improved pricing in DRAM and NAND flash-memory chips. Micron manufactures DRAM and NAND memory chips.
Micron CEO Sanjay Mehrotra thinks that the chip demand will recover in the second quarter. During the company’s first-quarter earnings call, he hinted that the second quarter would be “the cyclical bottom for our financial performance.” The demand for DRAM and NAND chips fell drastically in 2018 amid a downturn in the semiconductor cycle. Falling demand from the server market, as well as smartphone companies, also hurt the demand. The US-China trade war fears added to the woes. However, the demand started to rebound in the fourth quarter of fiscal 2019 as inventories improved rapidly. I expect the chip demand to rebound more in the coming quarters.
Meanwhile, I expect share buybacks to benefit Micron’s earnings in the second quarter. In the first quarter, the company repurchased $50 million worth of shares to reward its shareholders.
In the first quarter, Micron’s revenue of $5.14 billion reflected a fall of 34.9% YoY. Meanwhile, the revenue rose 5.6% from the previous quarter. Notably, Micron’s revenues have improved sequentially for the past two quarters amid a recovery in memory chip demand. The company’s first-quarter EPS of $0.48 also fell 83.8% YoY and 14.3% sequentially. Notably, Micron’s earnings have fallen for five consecutive quarters on a sequential basis. The earnings declined due to gross and operating margin contractions and lower revenue. Lower memory prices led to a decline in the company’s gross and operating margins.
Analysts’ recommendations on Micron stock
Just a day ahead of the company’s second-quarter earnings results, many analysts have downgraded the stock. On Tuesday, KeyBanc slashed its target price on Micron stock to $48 from $63. RBC Capital also cut its target price to $55 from $65 on the stock.
However, some analysts are still bullish on Micron stock. They have put Micron’s 12-month target price at $65.01. The average target price is at a 50.24% premium to its current price as of Tuesday. Among the 37 analysts, 30 recommend a “buy,” five recommend a “hold,” and two recommend a “sell” on Micron stock. At the closing price on Tuesday, the company’s market cap was $48.1 billion.