Poor Micron Technology, Inc. (MU): This memory chipmaker has had a tough time during the past year, posting a horrendous loss of 61%.
Now that the latest earnings report provided little to inspire hope, is there really any hope for MU stock or should investors vacate the burning building that is Micron?
In fiscal Q2 the company suffered a 30% plunge in revenues to $2.93 billion and posted a net loss of 5 cents per share, down from a gain of 81 cents in the same period a year ago (the first loss since 2013).
The core memory business — focused on DRAM chips — is under pressure from the China slowdown, flagging PC sales, foreign currency volatility and excess supplies, such as from the aggressive production from players like Samsung (SSNLF) and SK Hynix (HXSCL). And on a quarter-over-quarter basis, DRAM sales prices and volumes dropped 10%.
That’s not all — Micron’s guidance didn’t exactly inspire much confidence. The company’s forecast for its quarter ending in May is for revenues of $2.8 billion to $3.1 billion, and a loss of 5 cents a share to 12 cents a share. That’s firmly under the consensus for revenues of $3.18 billion and a profit of 3 cents.
Is There Hope for MU Stock?
All fairly grim, right? Sure, but contrarian plays can make money. And yes, there may actually be a decent one with MU stock.
Signs of a bottom are forming in Micron. The Street reacted to MU’s bad quarter by sending it down only 2% in afternoon trading. Since mid-January, Micron shares have traded in a range of about $10 to $11.
Granted, just because MU stock may have bottomed does not mean it makes sense to jump in. Let’s face it, beleaguered tech companies can tread water for a long time. Just look at stocks like Zynga Inc (ZNGA) or Groupon Inc (GRPN).
In Micron’s case, however, there are potential catalysts sparking some excitement.
For one, Micron’s memory technology will be key for several emerging growth markets, such as with the automation of cars and homes. And Micron boasts a huge opportunity in the Internet of Things, which will certainly bolster the demand for memory chips.
But Micron has also been investing in upgrading its product line. There’s the GDDR5X, which allows for super-fast graphics processing, as well as the 20 nanometer 8GB chip, which should gin up lots of interest in the enterprise market.
And let’s not forget about mobile: While there have been pesky delays, it looks like things have gotten back on track. According to the earnings presentation: Micron is “well positioned for substantial volume growth by FQ4.”
What’s more, Micron is heavily invested in next-generation 3D NAND storage technologies, with Intel Corporation (INTC) as a strategic partner. In fact, over the next two quarters, the company plans an aggressive roll out of its Crucial chips.
Bottom Line MU Stock
Micron certainly has a rock-solid balance sheet, with $5.1 billion in the bank. During the latest quarter, MU generated an impressive $763 million in operating cash flows.
The valuation on MU stock is also dirt cheap, at only eight times forward earnings. By comparison, INTC trades for 12 times future profits and Qualcomm (QCOM) trades at a multiple of 11.
Again, there are definitely lots of challenges with Micron. But for investors looking for a contrarian play, this looks like an interesting best.
Given the extreme bearishness, there could be some nice gains if there is even moderate traction with some of its potential catalysts.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.