Micron (NASDAQ:MU) shareholders were looking for a good fiscal third-quarter earnings report on Tuesday evening. An early-year rally in Micron stock had faded.

Save for a brief late December dip, MU stock headed into the Q3 release at its lowest level in some 21 months.

At first glance, it appears Micron delivered. Earnings and revenue both handily beat Wall Street expectations. MU stock rallied on the news, gaining 13% in midday trading on Wednesday.

But it remains to be seen whether the gains hold – and the bet here is that they won’t. Longer-term, I still like Micron stock, recently calling it one of the 10 best S&P 500 stocks to buy. But I’ve also repeatedly argued that MU stock is not nearly as cheap as trailing earnings suggest and that headwinds in the memory category can’t be ignored.

Micron’s outlook for Q4 and beyond highlights those issues. And with investors clearly still nervous about semiconductor stocks more broadly, those issues may get more attention than the backward-looking beat.

Micron Wins and Losses

Again, Micron’s headline numbers handily beat expectations. Adjusted EPS of $1.05 was a solid $0.26 ahead of consensus. The figure also came in nicely ahead of the company’s guidance of $0.75-$0.95.

Revenue of $4.79 billion was roughly $100 million above the average Street estimate, though right in line with the company’s guidance of $4.6-$5.0 billion.

Based on those headline numbers, the rush into MU makes some sense. But looking closer, the results aren’t quite as impressive as they seem. Most notably, per the Q3 conference call, even adjusted EPS received a $0.15 boost from tax benefits.

To be fair, non-GAAP gross margin of 39.3% was toward the high end of a 37-40% range and operating expenses of $774 million toward the low end of Micron’s guidance. Operating results overall thus were better than expected. But on a pre-tax basis, Q3 wasn’t quite the monster beat headlines suggested.

Meanwhile, Micron’s outlook actually looks weak. The company is expecting fiscal Q4 revenue of $4.3-$4.7 billion – against consensus estimates of $4.9 billion. EPS of $0.38-$0.52 is well below the Street’s estimate of $0.78.

Given the headwinds facing chip stocks, and MU stock, in particular, it seems likely that investors may focus on the outlook over the beat. And though I’m bullish long-term on Micron stock at these levels, that might be wise.

Why Micron Stock Stock Has Fallen

Expectations aside, both Q3 results and Q4 guidance show why Micron stock has fallen. Revenue dropped 38% year-over-year in Q3. Adjusted EPS declined by two-thirds.

Q4 will be even worse. Non-GAAP EPS was $3.53 in Q4 fiscal 2018. Even at the high end of guidance, profits would decline 85% year-over-year next quarter. Sales will drop in the range of 45%.

One key problem is pricing. Per management commentary, DRAM prices dropped almost 20% quarter-over-quarter. NAND pricing dropped “mid-teens”.

Micron’s fiscal 2018 earnings – nearly $12 per share on an adjusted basis – clearly were a peak. Fiscal 2019 profits will fall by close to half – and at the moment, analysts expect further declines in 2020.

The takeaway from Q3, at least from a near-term standpoint, might be that those analysts have it right. Micron is cutting its own capital expenditures, owing to oversupply in the industry.

It’s doubling its reduction of NAND production to 10%. CEO Sanjay Mehrotra admitted on the Q3 call that enterprise customers still have too much inventory. (So does Micron itself, still.) Supply from the industry will have to come down further.

But it will take some time, and this isn’t a new problem. The memory space has a history of booms and busts: Micron itself generated a full-year adjusted EPS of just six cents as recently as fiscal 2016. The worry now is that Micron is heading into another bust – and I don’t see Q3 as assuaging that worry all that much.

The Case for Micron Stock

It’s possible that Q3 results are simply better than feared, and will be enough to give MU stock a decent boost. Fellow memory play Western Digital (NASDAQ:WDC) has gained nearly 8%, suggesting that at least a few investors saw Micron’s report as good news for the memory industry.

Investors also bid up Intel (NASDAQ:INTC) and equipment manufacturers Lam Research (NASDAQ:LRCX) and Applied Materials (NASDAQ:AMAT) at least 3% each.

And even if MU stock’s gains fade, I still think there’s a long-term play here. Micron management continues to highlight longer-term demand tailwinds from AI, 5G, and IoT (Internet of Things). The inventory supply will get back into balance.

The issues surrounding Huawei, a Micron customer, represent a near-term problem that will eventually be resolved. Micron’s big fiscal 2018 brought in a huge amount of cash: the company has net cash of $3 billion and continues to buy back stock.

Even declines in FY20 profits still leave Micron stock reasonably cheap, at about 8x forward earnings. If a rebound takes until calendar 2020, that’s still not the end of the world for MU stock.

But trading in chip stocks of late suggests that investor patience right now is limited. And that trading suggests that as investors digest the report, the focus may turn to the concerns and away from the headline numbers.

Long-term, MU stock still looks attractive. But believing that Tuesday’s report will set the long-awaited bottom seems too optimistic.

As of this writing, Vince Martin has no positions in any securities mentioned.