Is Micron Technology Stock a Buy Now?

Is Micron Technology Stock a Buy Now?

  • Technology
  • July 4, 2022
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  • 7 minutes read

Micron technology (MU -2.95%) released its third-quarter earnings report on June 30th. The memory chip maker’s revenue rose 16% year-over-year to $ 8.64 billion, which matched analysts ’expectations. Its adjusted net income increased 35% to $ 2.94 billion, or $ 2.59 per share, which also clarified the consensus forecast by $ 0.15.

Micron’s growth rates were stable, but its orientation was grim. For the fourth quarter, it expects its revenue to decline 13% year-over-year and its adjusted earnings per share (EPS) to fall 33%. Analysts expected their revenue and adjusted EPA to increase 10% and 7%, respectively.

An investor consults a portfolio on a computer.

Image source: Getty Images.

Shares of Micron only fell slightly after the company provided that bleak outlook, suggesting that a lot of bad news had already been incorporated into its 40% drop this year. Should investors buy these cyclical chip stocks today?

The cyclical slowdown is finally here

The memory market, which consists mainly of DRAM and NAND chips, is very cyclical. The previous slowdown in the sector caused Micron’s revenue to decline year after year for six consecutive quarters during fiscal years 2019 and 2020, which ended in September of that calendar year.

After this drought ended, Micron’s revenue rose for nine consecutive quarters. Its revenue increased 29% in fiscal year 2021 and grew 24% year-over-year to $ 24.1 billion in the first nine months of fiscal year 2022. Unfortunately, Micron’s forecast for the fourth quarter indicates that the streak will finally end.

MU (TTM) revenue chart.

Source: YCharts

Micron shipments have increased over the past two years, as growth in cloud and data center markets, rapid computer sales, and the expansion of the automotive and industry 4.0 markets have driven demand. fierce of more memory chips. During its second-quarter March report, Micron said it still saw a “healthy supply-demand balance” in the DRAM and NAND markets.

But during its third-quarter presentation, Micron said its expectations for the industry had “moderated” since its previous earnings call, mainly due to supply chain challenges and softer demand. of computers and smartphones. In response, it plans to take “immediate action” to curb supply growth.

In other words, Micron previously underestimated the headwinds of the industry, and is now slowing down before flooding the market with cheap chips, which could lead to another oversupply like 2019 and 2020.

However, it is also clear that the cyclical fall in the stock market has begun again and investors should prepare for further revenue falls. Throughout the 2022 calendar, Micron expects industry demand growth to remain “below the long-term CAGRs of medium to high teens.”

Their margins are shrinking

Micron’s adjusted gross margin fell 50 basis points year-over-year and 40 basis points sequentially to 47.4% in the third quarter. He attributed this decline to a higher combination of lower-margin NAND chips, which contributed 26% of its revenue, as opposed to higher-margin DRAM chips, which accounted for 73% of its top line. However, its average selling prices of DRAM and NAND chips still declined sequentially in the third quarter. Its adjusted gross margin is expected to fall to around 42.5% in the fourth quarter.

Its operating margin increased 450 basis points year-on-year and 110 basis points sequentially to 36.4%, but this expansion was caused mainly by the timing of its technological developments and product rating this year rather than the intentional reduction. of its operating expenses.

It plans to reduce its operating expenses over the next few quarters as it controls its production to cope with “current market conditions,” but still expects these costs to increase sequentially in the fourth quarter (due to problems of calendar) before the savings start and significantly increase their operating margins.

Is Micron too cheap to ignore?

During the conference, Micron Chief Financial Officer Mark Murphy said that “long-term market demand trends remain constructive,” but that selected market weakness and macroeconomic uncertainty would affect short-term outlook and visibility. term “of the company.

Micron shares initially look very cheap with only five times next year’s earnings and less than twice next year’s sales. However, these valuations are also based on analysts ’optimistic estimates for 14% revenue growth and 20% earnings growth in fiscal year 2023.

These forecasts are likely to be reduced to account for Micron’s negative orientation, so their actual valuations could be much higher. That said, Micron would still be cheap compared to other chip stocks like AMD (AMD -3.66%) i Nvidia (NVDA -4.20%)trading at 20 and 29 times futures, respectively.

However, investors should keep in mind that AMD and Nvidia also sell a wider range of chips and are not “pure games” in the memory market like Micron. Most of Micron’s direct competitors, including Samsung and Western Digital (WDC -3.15%) – also produces products in addition to cyclic memory chips.

Move away from Micron (for now)

Micron is still a solid chip maker, but investors should not buy cyclical stocks right after their growth reaches a multi-year high. For now, investors should hold on to less volatile technology stocks until Micron’s short-term outlook stabilizes.

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