Before earnings, Micron (NASDAQ:MU) stock was trading higher. In the past month, shares rose from around $43 per share to the $50 per share price level. But after earnings were released Sept. 26, the stock saw a pullback. Despite beating revenue and earnings per share guidance, Micron stock fell roughly 7% after hours, to around $45 per share.
Micron’s bread-and-butter continues to be a challenged market. Micron CEO Sanjay Mehrotra talked up “improving industry demand,” but hedged by saying Micron was “mindful of continued near-term macroeconomic and trade uncertainties.” The U.S.-China trade war adds an additional layer of risk to Micron’s future performance.
But what does this all mean for MU stock? In prior analysis, I have been bullish on Micron stock. New developments do little to change that thesis. Let’s take a closer look at the company’s latest earnings release and see why MU stock remains a contrarian buy.
A Closer Look at MU Stock Earnings
Micron’s Sept. 26 earnings release was for the fiscal year ending Aug. 31, 2019. Sales for the fourth quarter rose to $4.9 billion, up from $4.8 billion in the prior quarter. However, year-over-year, sales were down roughly 42%. Quarterly GAAP earnings were 49 cents per share, beating consensus by 8 cents per share. For the full year, earnings were $5.51 per share.
Micron expects next quarter’s sales to be near $5 billion and GAAP EPS to come in at 42 cents per share.
But let’s not ignore the elephant in the room. The inclusion of Huawei on the U.S. Bureau of Industry and Security’s “Entity List” — a list of entities that have or are suspected of engaging in activities against U.S. national security interests — impacted Micron sales. The Chinese telecom equipment giant is Micron’s largest customer.
Micron has applied for a license to allow it to continue business with Huawei. But the U.S. Department of Commerce has yet to approve the application. Losing Huawei as a customer is a big risk for Micron stock. According to Bernstein’s Mark Newman, losing Huawei could reduce Micron’s revenue by 10%-12%. But Newman sees it as a “short-term headwind,” as Micron will likely sell this inventory to another end-user.
With the stock already selling at a low valuation, these results are in line with expectations. But is the stock still a bargain? Let’s take a look at valuation, and see how MU stock stacks up to its peers.
Micron Stock Still Looks Like a Value Trap
In prior analysis, I have discussed how Micron stock looks like a “value trap.” This means while shares look undervalued, the perception is that the company’s value will be impacted by future performance. In other words, the market’s valuation of the stock is on point.
Micron Stock continues to trade at a low valuation. The company’s forward price-to-earnings ratio is 8.9. The company’s enterprise value/EBITDA ratio is 3.2. On an EV/EBITDA basis, MU stock continues to trade at a discount to its memory chip peer Western Digital (NASDAQ:WDC). WDC trades at an EV/EBITDA ratio of 12.3.
The beleaguered memory chip space continues to trade at a discount to other semiconductor names. GPU makers such as Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) sell at higher earnings multiples, despite growth challenges. Even broad-line dinosaur Intel (NASDAQ:INTC) sells at a higher valuation than Micron stock (forward P/E of 12.4, EV/EBITDA of 7.5).
With regards to Micron, investors are waiting for the other shoe to drop. You can buy MU stock at a fire sale valuation, but the implication is that earnings could further deteriorate. But buying now may be an opportune time. A contrarian play on Micron stock could pay off if the memory chip market rebound exceeds expectations in the coming year.
Micron Remains a Contrarian Bet
The recent earnings release does little to change my position on Micron stock. The company faces many headwinds. The DRAM and NAND markets are rebounding, but remain challenged. The U.S.-China trade war remains a wild card. If the situation gets worse, the company’s revenue could see a 10%-12% haircut. This would materially impact the MU stock price.
But Micron is what it is, a large-cap contrarian play. While shares trade slightly higher than where I feel comfortable, the company could see material upside if reality beats expectations. On the other hand, I can see MU falling back to the mid-$30s price range. Right now may not be the time to buy Micron stock. Keep MU on your radar for an even better entry point.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
