Prior to its fiscal fourth-quarter 2018 earnings report, Micron (NASDAQ:MU) faced a make-or-break moment. Throughout most of the first half of this year, Micron stock jumped to a very healthy double-digit lead. But toward late June, MU shares faltered, signaling concerns for the broader technology and semiconductor industry. Prior to yesterday’s earnings report, MU stock traded hands as high as $47.22. As of this writing, Micron’s stock is down 3% to $44.65.
More than a few investors will note that the volatility in MU appears unnecessary. In the company’s previous earnings report (fiscal Q3 2018), it delivered a resounding beat across the board. Against a consensus earnings per share target of $3.14, Micron delivered a penny higher. It also beat the guided average target of $2.83. Moreover, against a revenue target of $7.7 billion, MU rang up $7.8 billion. This was also significantly higher than the previously guided range between $7.2 billion and $7.6 billion.
Most bears could not find fault with Micron’s forward guidance, as management raised their expectations. Shares of MU experienced a modest gain following the Q3 report.
So what went wrong? You can blame the ongoing trade dispute between the U.S. and China. Right around the time Micron released its Q3 report, President Donald Trump threatened to impose $200 billion worth of tariffs on Chinese goods. Earlier this week, Trump made good on his threats. Naturally, the Chinese responded with their own $60 billion tariff, significantly impacting Micron stock.
Of course, Micron isn’t the only victim. Several semiconductor companies, including Western Digital (NASDAQ:WDC), Applied Materials (NASDAQ:AMAT) and Lam Research (NASDAQ:LRCX), have suffered worse declines.
This is why the most recent Q4 earnings report was so critical. As one of the world’s leading chipmakers, Micron is a barometer for the rest of the sector. If a respite from the storm was the hope, Micron stock fell short.
Micron Earnings Fall Short
In business and in life, context is everything. The chipmaking giant, on paper, had the right stuff. Unfortunately, Wall Street wasn’t here for the ink. Instead, it wanted to get the dirt on guidance, which is where the story fell apart.
First, let’s look at the details. Consensus estimates called for per-share earnings of $3.34. MU beat the target soundly, pulling in $3.53, or nearly a 6% surprise. In the year-ago quarter, the company delivered $2.02 EPS.
The revenue picture was just as impressive. The Street anticipated top-line sales of $8.25 billion. The chipmaker produced $8.44 billion, or a 2.3% surprise. Additionally, this figure represented a massive 38% lift from the $6.1 billion seen in the prior-year Q4.
If the conference call ended on that note, the damage to Micron stock would be limited. However, management disclosed a sharp decline in expectations for fiscal Q1 2019. Now, the company forecasts EPS of $2.95 on $8.1 billion in revenue. Covering analysts expected $3.06 EPS and sales of $8.44 billion.
Traders reacted to the news swiftly. Prior to management’s guidance, MU stock jumped approximately 5% in the after-hours session. When the downgraded forecast came in, Micron dropped as sharply as 7%.
The reason for the panicked trading is understandable. According to Reuters, the Chinese market accounts for half of Micron’s revenues. In prior months, political pundits probably felt that President Trump was bluffing regarding escalating the tariff war. We’ve all seen his posts on Twitter (NYSE:TWTR).
Of course, Trump wasn’t bluffing, which sets in motion an ugly situation. The Chinese government absolutely cannot lose face, and must respond with their painful sanctions. In a situation where neither side wants to blink first, Micron stock appears the ultimate loser.
Micron’s Journey Will Be Rough
I’m not a geopolitical expert, but I’m almost certain that the U.S. will emerge victorious in this economic stare down.
The low-hanging fruit is that we’re the number-one economy in the world. This isn’t just a statistical boast: we are the heart of the global economy. The greenback is the world’s reserve currency. English is the international language. While this hegemony will inevitably change, it’s not going to happen overnight.
The other point is that the Chinese are hurting considerably more than we are. During the trailing two decades, the average Chinese citizen gained tremendous wealth. That paradigm has alarmingly faded. Now, the Chinese must pick between nationalistic sentiment or economic growth. Surprisingly, many people are aggressively voicing support for the latter.
Finally, no matter how ugly this situation is for MU stock and tech in general, we must win. Business cannot flourish without a fair and transparent playing field. While I understand that many Americans don’t like Trump — and admittedly, he causes many distractions — he’s right on this issue.
Having said that, it’s going to be a rough road ahead. I’m still bullish on Micron stock for the longer-term, and those that have patience now enjoy a discounted opportunity.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
