Micron Technology, Inc. (NASDAQ:MU) easily stands out as one of the top comeback stories of 2016. After suffering steep volatility earlier in the year, along with the sector-specific Market Vectors Semiconductor ETF (MUTF:SMH) as well as the broader Technology SPDR (ETF) (NYSEARCA:XLK), MU stock roared back. From the open to the final close, Micron stock gained an impressive 58%.
Even more encouraging for those that came abroad later, enthusiasm for MU stock shows no evidence of fading.
In sharp contrast from a year ago, Micron stock laid up 2% in January, followed by a 1% move in February. The current month, though, is looking to be the most optimistic. Presently, MU stock is up over 11% from Mar.1. Should the trend hold, it could easily slide into 4% or 5% territory.
The only thing standing in the way is the company’s second quarter of fiscal year 2017 earnings report, set for a Mar. 23 release. Will Micron earnings justify the pronounced rally in MU stock, or has the bullishness finally run its course?
Raised Expectations for MU stock
In Q2 of 2016, Micron earnings expectations were sharply pared. The consensus called for an earnings-per-share loss of 8 cents. To its credit, MU registered a loss of only 5 cents, representing a 40% positive surprise.
Back then, Wall Street adjusted their outlook based on the computer chip supply glut that hammered sales for the industry. Now, the emphasis has shifted to growth and recovery. For MU in particular, it has a “strong hold on the dynamic random-access memory (DRAM) market,” according to InvestorPlace contributor Chris Fraley. This is one of the segments in the chip-making world that has responded vigorously in demand. Logically, this bodes well for MU stock.
For this upcoming report, analysts are forecasting EPS estimates to range between 62 cents at the low to 89 cents at the high, with consensus pegged at 80 cents. On the revenue side, the spectrum is between $4.5 billion and $4.7 billion, with consensus at $4.6 billion.
Multiple reasons for optimism exist. First, benchmark funds SMH and XLK are trending bullishly this year. Improvements in the chip supply glut dilemma, as well as President Trump’s promise of a business friendly environment are strong contributors. Second, industry tailwinds have translated to substantive financial gains. MU stock finally returned to profitability last quarter, and top-line sales are moving in the right direction.
Finally, with management weathering what’s hopefully the worst of the storm, MU stock looks like a great value. At 7.5X forward earnings, Micron stock is offered at a steep discount compared to semiconductor outperformers like Advanced Micro Devices, Inc. (NASDAQ:AMD) and Nvidia Corporation (NASDAQ:NVDA).
Micron Earnings Are No Breeze
No matter how wonderful the turnaround has been for semiconductors overall, its previous hemorrhaging is difficult to ignore. For example, despite its tremendous rally in the markets, MU stock is 29% below its 2014 closing high. Yes, MU has impressed investors that boarded the train in the trailing year, but it’s got work to do for the long-term faithful.
Another risk factor is the competition. Although Micron stock benefited handsomely from the semiconductor reversal of fortune, it’s not the only rodeo in town. Problematic for the company is Western Digital Corp’s (NASDAQ:WDC) acquisition of SanDisk Corporation (NASDAQ:SNDK). Thanks to SNDK’s expertise on NAND flash memory, WDC will go head-to-head against MU in this lucrative sphere.
Worryingly, Zacks Equity Research went on the record stating their lack of conviction for Micron earnings. While they acknowledge the bullish argument for MU stock, its competitive landscape is volatile, to say the least. Other hungry rivals are anxious themselves to make up for lost ground. Now that the initial euphoria has faded, it comes down to which company can dig the deepest. As such, Zacks is muted on Micron earnings, offering no variance on the consensus forecast.
Micron Stock Has a Fighting Chance
That means its currently riding a six-win hitting streak. Just on pure probabilities alone, it seems very reasonable that Micron earnings would make another beat.
The other aspect to consider is context. In the broader picture, MU stock does very well against analyst expectations. In the present winning streak, the positive surprise for Micron earnings reports is averaging 24%. All but one — Q1 FY2016 being the exception — has registered in the single digits. That type of recent over-performance makes it harder to doubt MU.
On a side-note, Micron stock did start this week strongly, ending Monday up 1.6%. It’s difficult to determine if that means anything. In prior years, Micron stock fell into red ink prior to pulling off a big earnings beat. However, the only miss since 2014 occurred when MU was volatile just prior to the earnings release. Given all the circumstances, Micron earnings definitely have a fighting chance of making it seven in a row.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.