The most eagerly anticipated earnings release of the month comes out September 20 after the market closes. Micron (NASDAQ:MU) will deliver its results for the quarter ending in August, and the whole technology marketplace could rise or fall on the earnings report from MU stock.
The consensus is that Micron stock will earn $3.34 per share on revenue of $8.22 billion. But the “whisper number,” the one market analysts are supposedly telling their best customers, is that the earnings will be only $3.30 per share.
In short, analysts are expecting bad news. A lot of bad news is already priced into the stock. Even after the last week’s 8.6% bounce-back, MU stock price has still plunged 23.5% over the last three months.
Is MU Stock Cheap? Or Missing Something?
At its current $45 price, Micron stock is super cheap. The price-to-earnings ratio is down to 4.5 and were it to keep up its 2018 revenue run rate — with $15 billion already in for the first two quarters of the calendar year — MU stock would be trading at 1.67 times sales.
For a tech stock, that’s ridiculous. Intel (NASDAQ:INTC), with all its highly-publicized troubles, trades at over three times sales.
MU stock is cheap because people expect it to falter. Memory prices are falling as supplies come into balance with demand. DRAMexchange, which follows the market, sees prices falling 15-25% in the fourth quarter of the year.
Memory prices are supposed to fall. Moore’s Law holds that chip yields grow as production ramps up, that costs keep going down, and that each new generation of chips represents another giant leap in price-performance.
Until now, Micron has been riding a “super-cycle”: chip memory is replacing disks in PCs and cloud-data centers, new applications are appearing in self-driving cars, health systems and the Internet of Things, and intelligence is being added to everything from jet engines to toasters.
The question is whether supplies will swamp that super-cycle.
As I wrote less than a week ago, the super-cycle is leading to super-investment. China is building its domestic chip industry as fast as it can and has been accused of outright theft of Micron designs. The huge China memory market may be closing even faster as the trade war rumors turn into tariff bombs falling on markets.
A Future of Over Supply
The fall in MU stock price, in other words, isn’t just driven by this quarter, but forecasts for a flood of cheap memory that will overwhelm the current super-cycle and drive suppliers to the wall.
Micron has been here before. Its MPC spin-off, which made computers with its memory chips, went bankrupt in 2008. Micron bought another memory maker, Elpida Memory, out of bankruptcy in 2012. Micron has been riding the boom-and-bust cycle of memory for decades. Its Virginia plant was part of a 2001 deal with Toshiba.
The Bottom Line for MU Stock
The challenges before CEO Sanjay Mehrotra have just begun, but he was made for this moment. He has been riding the memory market for 30 years, co-founding Sandisk in 1988 and serving as CEO until it was bought by Western Digital (NASDAQ:WDC) in 2016.
Meanwhile, hedge fund manager and Carolina Panthers owner David Tepper continues to talk up Micron, insisting that the demand super-cycle will keep supply from swamping the industry.
Micron has $5.4 billion in cash and short-term receivables with which to ride out the coming storm. It’s cash it can use to build out its second Virginia plant and cash that Mehrotra hopes can help it deal with future net losses.
I’ve said it before. I believe in Sanjay Mehrotra. But it’s going to be a stormy ride, and today’s earnings report is just the first rain band. But it’s a storm that won’t just hit MU stock. The implication that the memory super-cycle is no longer as profitable could hit the entire tech sector.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.