In January, when I last wrote about Micron (NASDAQ:MU), I noted that while MU stock was getting cheap, you couldn’t buy it until demand started to turn up again. Here we are, six months later, and the stock has done nothing.
The Micron stock price was up just 2% year-to-date, far lagging the stock market as a whole, heading into Micron’s earnings report Tuesday.
Micron’s under-performance doesn’t come as a surprise. Periodically, the bulls have tried to argue that Micron is becoming a less cyclical company. But this argument hasn’t played out in Micron’s earnings reports. Micron looks dirt cheap, on an earnings and trailing price-to-earnings ratio basis. That’s because, with good reason, investors don’t believe the boom days will be coming back soon.
Micron’s Unimpressive Earnings “Beat”
As of this writing, MU stock has popped more than 10% following the company’s latest earnings report. There is good reason to be skeptical of whether this earnings report will end up changing the stock’s trajectory much, though. Here’s why.
Remember that just six months ago or so, earnings guidance for Micron’s Q2 had been $7.2 billion. They slashed it 20% to just a midpoint of $6 billion. Think about these sorts of numbers when an MU stock bull says the company is becoming less cyclical. Anyways, from there, actual Q2 revenue came in at $5.8 billion, toward the low end of Micron’s already disastrously cut guidance.
Now, Q3 revenues collapsed, again and people are celebrating. Revenues for this quarter reached just $4.8 billion, down another cool billion sequentially from last quarter. But, analysts had expected $4.7 billion, a slightly larger drop, so now MU stock is rallying on the news. Regardless, you’re still looking at a company whose business is in freefall. Beating revenue guidance by $90 million when revenue drops by a billion over the course of three months is a rather modest accomplishment.
More Negative Signs In The Earnings Report
Again, Micron’s headline numbers look fairly good. They beat significantly on EPS guidance as well, as margins fared better than expected. That saved this quarter from being a total fiasco. While Micron gets some credit for stable margins, the severity of the revenue plunge – whether it beat estimates or not – still far overshadows this positive.
Moreover, you can’t just blame this on one particular line of business that is really suffering. All business segments are looking dreadful. On a quarter over quarter basis, DRAM dropped 19%, NAND fell 18%, Compute and Networking fell 13%, Mobile plunged 27%, Storage sunk 20%, and Embedded revenues were the star performer, only dropping 12%. The revenue change for each of these market segments was even worse yet on a year-over-year rather than quarter-over-quarter basis.
Outlook Still Bad
Anyone looking for a quick turnaround in Micron’s fortunes, or MU’s stock price will be disappointed. CEO Sanjay Mehrota claimed victory on this quarter’s results, but quietly slipped in the bad news afterward:
“Micron’s improved competitive position and strong execution helped us deliver solid results despite a challenging environment. While we are seeing early signs of demand improvement, we plan to reduce our capital expenditures in fiscal 2020 to help improve industry supply-demand balance”.
That’s right, Micron is cutting CAPEX again due to falling demand. Looking at the quarterly earnings results, we see their inventory levels continue to spike. They’re up to almost five months worth now. This indicates that product is moving even slower than management had anticipated. It also puts the company at significant risk of product obsolescence if inventory continues to pile up and newer and better versions of products appear before the old stuff sells out.
Notably, Micron is looking at Q4 earnings around 45 cents per share, or down another 50% or so from this quarter. Anyone buying Micron stock based on its low trailing P/E ratio is making a huge error. Going forward, earnings-per-share will be just a couple of bucks annually, if that. That makes the P/E ratio look like a much more normal 15x or so, not the single-digits reading that you see on financial sites now.
MU Stock Verdict
Don’t let this latest earnings report fool you into buying MU stock. This is a false dawn for the company. Sure, the earnings report looked great on the surface. But there’s less there than it would appear at first glance. Revenues continue to plummet across all business segments. And Micron is cutting its spending again, indicating that things aren’t at a turning point yet.
Also, it’s worth noting that management bought back very little Micron stock despite its weakness over the past quarter. This could be a prudent capital allocation decision, particularly if MU stock falls further allowing it to buy back cheaper shares. For now though, with inventories soaring, revenues plummeting and management cutting spending again, this is clearly not the time to get hyped up for Micron stock. Maybe some external factor, such as a trade war resolution, will pop the stock. But based on its own business fundamentals, Micron hasn’t touched bottom yet.
At the time of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
