Investors will closely watch the quarter earnings report from Micron Technology, Inc. (NASDAQ:MU) this Thursday, June 29 after the market closes. Ahead of the results, MU stock is already at or above yearly highs. The analyst upgrade on June 26 gave bulls another reason to buy more shares. But will Micron impress investors enough that its stock does not “sell on the news?”
Cowen raised its price target on MU stock to $38 a share, up from $34. On the same day, Wells Fargo upgraded MU stock and set a $40 price target. Wells Fargo cited favorable pricing will drive revenue growth and margin improvements.
At its current share price of around $32, Micron is still trading at a forward price-to-earnings multiple of just 6X. But the more the stock rallies ahead of results, the greater the risk that the stock will “sell on the news.” Micron may very well trounce expectations for the quarter. Merely reiterating the same earnings forecast should not cause the stock to fall after the earnings report.
Memory supply is still tight, while demand continues to move higher. New smartphones demand more memory while in the PC market, DDR4 memory sales will rise as customers refresh their desktops.
The product refresh from Advanced Micro Devices, Inc. (NASDAQ:AMD), with Ryzen on the desktop and EPYC in the server market, will only accelerate the upgrade cycle. Intel Corporation (NASDAQ:INTC) announced new Core i9 processors. The fastest, most expensive, $1,999 chip will not come out until October of this year. Both chip suppliers are stimulating higher demand for desktop and server memory chips.
MU Stock: Outlook
Micron expects 1X DRAM deployment will happen before the end of the fiscal year. The 20-nanometer manufacturing process will get deployed throughout its portfolio. Meaningful quantities of the 64 layer 3D NAND will be deployed by the end of the fiscal year. In that timeframe, 75% of Micron’s NAND will be on 3D.
Micron’s operating expenses totaled $612 million last quarter, so investors should not expect this to move higher in the current reporting period. In fact, Micron forecast costs falling to as low as $560 million. The incredible $1.77 billion in cash flow generated last quarter could continue again. Strong memory and NAND pricing could even help Micron exceed its revenue forecast of $5.2 billion to $5.6 billion for the upcoming third quarter. MU also forecast gross margin of between 44% to 48%. The company expects to earn $1.43 to $1.57 a share.
3D XPoint Release
Intel and Micron are redefining the storage architecture for solid state drives (“SSD”). A preliminary analysis of the upcoming technology shows the manufacturing process is 20 nm. This will give 3D xPoint a 4.5 times density advantage over current DRAM on the market. For MU stock, the competitive edge will make sure high profit margins for many quarters to come.
On the conference call, when Micron was asked about the advantage of 3D, management was cryptic: “we’ve given you all the building blocks that you need to derive a gross margin profile and that’s not something that we typically share. ” But Micron stock investors may infer that profits will get better because costs will fall over time as 32-layer 3D production ramps up.
Bottom Line on Micron Stock
MU has seasonal strength in the months ahead and is benefiting from a favorable environment for memory and storage NAND chips. It is refreshing its products towards 3D and is shifting manufacturing to 20 nanometers. This suggests Micron’s management will keep or even raise its forecast.
Despite the stock already rallying significantly, investors should continue to look at Micron stock’s future in a favorable light.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities. He runs a DIY Investing newsletter for value investors.
