After reporting stellar quarterly earnings and an even better outlook, shares of Micron Technology, Inc. (NASDAQ:MU) act as if the company faces troubles ahead. Micron stock fell steadily after the company said on Dec. 19 that it would raise its EPS estimates for the second quarter.
Major Selling From One Company
Toward the end of December, Nanya Technology started selling 451,000 shares of Micron stock to repay its loans. So even with bullish buying of MU stock, the market has lots of selling pressure it must first absorb. Nanya’s stock sale added to the negative momentum, but that will eventually end. The selling is nearly complete.
More importantly, the sale is related to a cash raise for Nanya. It is not selling Micron stock in the expectation that market conditions are worsening. Even with MU stock’s underperformance, Micron has other pressing matters.
Samsung continues to grow rapidly, and the conglomerate is enjoying rich profit margins. Samsung and SK Hynix could increase supply to take Micron’s market share. But doing so would hurt all players in the NAND and DRAM market.
In the near term, investors may safely assume that supply will not change and that the big chip suppliers will all maintain output at the same rate. Since the demand for memory and storage, driven by strong computer and smartphone sales, will go up, Micron’s profit margin will increase as well.
Tough Year-Over-Year Comparables
Micron stock rose 87.6% in 2017, so if the company does not meet its earnings guidance, then the stock could correct lower. Fortunately, suppliers keep adding the amount of memory and storage in new phones. They will continue doing so, due to consumers driving for better specifications.
Unless prices are so high that phone makers will stop offering phones that have plenty of memory and data storage, Micron and Samsung are better off introducing only incremental changes. That would end up encouraging phone makers to develop better, more efficient software.
Micron Expects Better Profits
Micron forecast gross margin topping 50%, while revenue may get to $3 billion. Operating income will top out as high as $3.09 billion, compared to the $2.65-$2.85 billion that the market expected. At an annualized $10/share in earnings this year, Micron could have made even more per share had it not issued shares and bought back debt instead.
Either way, Micron comes out ahead. Instead of servicing a higher debt profile, Micron is managing its balance sheet conservatively. It is aware that chip prices could fall dramatically without warning, even though that is not likely to happen at this time.
None of the suppliers, including Samsung, would want a price war where all players suffered. With higher memory content added to each device (be it phones or computers), chip prices will stay at high levels in the foreseeable future.
Takeaway for Micron Stock
Micron managed its balance sheet conservatively despite its business benefiting tremendously from strong demand and tight supply. Its appeal in the bond market is improving, and at lower debt levels, its recent moves will make the company investment grade.
That Micron stock rebounds is of secondary importance. Management must first maximize profits, grow cash flow and then deal with the weak share price, if at all.
Value investors will like MU stock today because it trades at a forward P/E of below five times. Looking ahead, expect the company to report profits that are better than its latest projections, thanks to favorable DRAM and NAND pricing.
With these conditions likely persisting throughout the year, investors have plenty of time to accumulate the stock on the dip. By the end of the year, chances are good that the stock closes higher than where it is today.
Disclosure: Author does not own shares in any of the companies mentioned.
