JP Morgan is out with a bullish note on Micron Technology, Inc. (NASDAQ:MU) in which the Wall Street firm not only reiterated its Overweight rating and $82 price target on Micron stock, but also recommended buying shares ahead of the company’s next earnings report.
Micron is due to report earnings after the bell on Wednesday, 6/20. JP Morgan expects the numbers to be quite good given improving fundamentals in the memory market, driven primarily by robust cloud data center spend. That is why JP Morgan is telling client to the buy stock before the report.
But is that the smart move? Should you by Micron stock ahead of its third quarter earnings report?
I’m not so sure. I’m a big bull on Micron stock. I love the long-term growth narrative surrounding the company’s secular growth prospects through data-centers, AI, automation, and next-gen technologies. I also think Micron stock can head towards $70 by the end of the year.
But buying the stock ahead of earnings? That’s a risky move, and the upside isn’t that compelling. Historically, this stock drops after even the best earnings reports. And even when the stock does rise, the post-earnings rallies are relatively small in the big picture.
As such, I say sit out earnings. Wait to see what management has to say. And then, if the numbers are good and point to strengthening fundamentals, buy Micron stock.
Here’s a deeper look.
Micron Has Strong Long Term Fundamentals
I’ve been saying this for a while, and I’ll say it again: Micron stock has really strong long-term fundamentals.
Despite the bear cries for a massive pullback in profits, which is natural in the semiconductor industry, the fundamentals underscoring this golden era in memory demand imply that this time is slightly different.
Right now, memory chip demand is being pulled higher by robust demand from multiple markets, including data centers, AI, and automation. The increasing complexity of these chips has created a supply lull, which has simultaneously led to a jump in chip prices and MU profit margins.
Inevitably, chip supply will rise, and that will erode currently sky-high profit margins. But the extent of this erosion will be mitigated by what will presumably be big demand from data-center and automation end-markets for the next 3 to 5-plus years.
From a numbers perspective, supply ramps have historically caused a peak-to-trough earnings collapse of $3 to $4 per share over 2 years. Although it is unlikely because of the company’s robust end-market demand, let’s just assume that the next supply-ramp earnings collapse is $4 per share (the high end).
Earnings are expected to peak this year at $11.50. But estimates have been consistently trending up. At the end of the day, I expect earnings to shake out at $12 per share this year. A $4 erosion implies an earnings bottom in 2 years of $8. A historically normal 9.7-times forward multiple on $8 implies a 2019-end price target of $77.60.
Discounted back by 10% per year, that equates to a 2018-end price target of just over $70.
But Earnings Create A Lot Of Noise
Although I think Micron stock can and will rally to $70 by the end of year given improving fundamentals in the company’s core memory markets, I don’t think much of that move will come in direct response to the third quarter earnings report.
Historically, earnings reports create a lot of noise for Micron stock, regardless of how good the numbers are.
The past three earnings reports have all been double-beat-and-raise quarters for Micron. But in only one of them did Micron stock actually rally the day after the report (September 2017). Even then, the rally was small, from $34 to $37.
Over the next few months, Micron stock has rallied from $37 to $48.
In other words, Micron stock doesn’t normally pop on earnings. And even when it does, the big move happens in the multi-month window following the post-earnings pop.
From this perspective, I don’t see any reason to buy Micron stock ahead of its next earnings report. If you own it, stick with it. If you don’t, wait for earnings to shake out. These reports usually create a lot of unnecessary noise, but don’t present a ton of opportunity. Patience won’t be punished.
Bottom Line on MU Stock
Robust demand driven by cloud data center and automation spend will drive Micron stock materially higher by the end of the year. But that upside won’t materialize in direct response to the third quarter earnings report.
If anything, the report will create a lot of noise, but not a lot of opportunity. So if you’re long, stay long. If not, just wait. You likely won’t miss much.
As of this writing, Luke Lango was long MU.