Chipmaker Micron (NASDAQ:MU) just reported highly anticipated fourth-quarter numbers after the close on Thursday, Sept. 20. Those numbers were better than expected, and MU stock jumped in after-hours trade. Then, management delivered a below-consensus, first-quarter guide on the conference call. Investors were spooked, and MU stock swung from a big gain to a big loss.
In other words, there’s a lot of noise with respect to MU stock in the near-term. But, investors would be wise to block out that noise. Instead, fourth-quarter earnings affirmed two big conclusions that investors should focus on. Those conclusions are as follows:
- Micron stock is supported by powerful long-term growth tailwinds that should propel this stock meaningfully higher in a multi-year window.
- Things at Micron are still good, but not as good as they were before, and the market is freaked out by that.
What is the investment implication from those conclusions? MU stock is a “sell now, buy later” situation. The near-term outlook for this stock is marred by market fears regarding a down-cycle, which includes negative revenue growth, margin compression and earnings erosion. When those things happen, MU stock tends to under-perform. Thus, so long as those fears remain in the market, the stock will be weak.
But, those fears are being over-exaggerated by the market. In the big picture, this down-cycle will be muted relative to historical down-cycles due to robust and diversified demand drivers. Because the valuation on the stock has compressed to “priced for death” levels, Micron stock could soar once the market realizes that earnings will be fine long-term.
When will the market realize this?
No one really knows. But, with the Q1 guide coming in weaker than expected, sentiment on this stock will almost assuredly remain weak for the foreseeable future. Until that sentiment shifts, there’s no reason to own this stock, despite its enormous long-term upside potential.
The Long-Term Outlook for Micron Stock Is Promising
The whole market is concerned about a coming down-cycle in Micron’s core memory markets. A down Q1 guide only augmented those fears, as Q1 revenue and earnings growth is projected to decelerate meaningfully while gross margins are actually expected to compress sequentially.
But, revenue growth is still healthy. Same with earnings growth and gross margins. All three are still at or near record highs. In other words, things are still good at Micron. Just less good than before.
The prevailing fear is that “less good” will turn into “not good” soon, and MU stock will drop like a rock. But, that fear misunderstands the fundamentals which influence Micron’s supply-demand situation.
On the demand side, you have unprecedented demand. Not just in terms of magnitude, but also in terms of diversity. Historically, demand in this market was almost entirely dependent on PC or smartphone demand. Now, though, the drivers are PC demand, smartphone demand, data-center demand, AI demand, IoT demand, big data demand, cloud demand, autonomous driving demand, so on and so forth.
Thus, if smartphone and/or PC demand weaken, historically that would’ve meant the whole demand picture weakened. Today, though, the demand picture is diverse enough to still remain robust even if smartphone and/or PC demand weakened.
On the supply side, the growing number of end-markets has increased chip production complexity. And, these chips are only getting more complex at an unprecedented pace. Thus, it is hard for production capacity to keep up with increasing chip complexity, so the market really isn’t subject to huge supply increases like it historically has been.
Thus, in the big picture, Micron’s supply-demand situation might weaken. But, it won’t get bad. If anything, it will remain quite favorable over the next several years. A favorable supply-demand situation means Micron can likely stabilize earnings in the $10-plus range. That earnings base easily implies a long-term price target for this stock of $60 or more.
The Near-Term Promises to Be Messy
While I’m bullish on MU stock in the long run, and see this stock running up to at least $60 and likely far higher in a multi-year window, I’m not a buyer today.
Why? Because the near-term for Micron stock promises to be messy.
Although it is pretty clear Micron’s supply and demand situation will remain favorable for the foreseeable future, it is not 100% clear. The only thing that is 100% clear from the Q4 numbers and Q1 guide is that the supply and demand situation is weakening. Because Micron’s drops have historically been so big and happened so quickly, the market is naturally taking a risk-adverse approach to MU stock this time around. Any near-term weakness is being extrapolated as a long-term headwind, and MU stock is being priced as such.
This dynamic will persist until it becomes clear that this down-cycle will be far less severe than prior down-cycles due to robust and diversified demand. I’m not quite sure when that will become crystal clear to the market. But, I doubt the market has that realization anytime soon with a dour Q1 guide hanging over the stock.
Consequently, I think MU stock will struggle in the near-term. It may not drop in any big way. But, I don’t see it rallying either.
Bottom Line on MU Stock
Sell now, buy later. Long-term upside potential is promising. But, near-term sentiment headwinds will weigh on this stock for the foreseeable future.
As of this writing, Luke Lango did not hold any positions in any of the aforementioned securities.
