Micron Stock Reflects A Slow Turnaround In Its Memory Business

Micron stock still has room to run up as the slow turnaround in the DRAM and NAND business takes root

Micron (NASDAQ:MU) stock still has room to move up as the turnaround in the memory business takes hold. MU stock has risen 67% so far this year and almost 24% since the end of Q3. But I suspect that Micron stock has a good deal further to go.

Micron Stock Reflects A Slow Turnaround In Its Memory Business
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For example, on December 18, 2019, Micron reported that it had booked its second sequential quarter of higher revenue. Its latest quarter to November 28, 2019, showed revenue up 5.5% to $5.14 billion.

This is after the prior quarter revenue had been up 1.7%. So the slow turnaround is starting to gain a bit of steam.

More importantly, free cash flow (“FCF”) for the three months was finally positive. Micron booked FCF of $68 million in its fiscal Q1 2020. That is a start. And it bodes well for the company’s finances.

Outlook Looks Better for Micron Stock

Granted, this performance is not very good on a year-over-year basis. For example, revenue was still down 35% from its November quarter (Q1 2019) last year. And free cash flow was down dramatically from $2.11 billion in a year-ago quarter.

But the quarter-over-quarter gains show promise that Micron’s memory business has finally reached an inflection point. Micron’s CEO said he expected the next quarter would be the “cyclical bottom” for financial performance.

If that is the case, here is what MU stock investors can look forward to, based on past performance. For example, less than two years ago, MU booked revenue of $7.35 billion in the quarter ending March 1, 2019. During that quarter MU produced FCF of $2.087 billion.

That represents an FCF margin of 28.4%. This is significantly higher than this quarter’s FCF margin of 1.3%. So when the turnaround happens, MU will start producing significant amounts of cash flow and cash.

Meanwhile, Micron has plenty of net cash, $2.7 billion, and $11 billion in available liquidity, to weather more difficulties.

Memory Demand and Prices Bottoming

Now that the Trump Administration has signed a limited new China trade deal, it is possible that Chinese buyers for DRAM and NAND memory products will increase. The second round of tariffs in June 2018 hit these kinds of chips.

A number of Chinese companies had stocked up on memory chips in anticipation of the tariffs. After they stopped buying during the period of peak tariffs, Micron’s business deteriorated significantly. For example, Micron’s revenue peaked in the quarter ending August 31, 2018.

But now that tensions have reduced somewhat between the two countries, these buyers might begin normal inventory accumulation and purchasing of memory chips. This will be how the turnaround begins to normalize.

Micron’s presentation on Dec. 18 indicated that demand for its products was in line with and slightly lower than expected industry growth.

However, Micron has guided that revenue for its fiscal Q2 ending February will be slightly lower than this past quarter. They projected that revenue would be between $4.5 billion and $4.8 billion. This will be a disappointment after the $5.14 billion booked this quarter.

What Should Investors Do?

Micron’s revenue and earnings will not return to prior levels until all the tariffs on memory chips are reduced. This may take some time, well into next year.

I suspect that Micron stock will bounce around a bit until then. But now is probably a good time to begin accumulating MU stock before the turnaround is completely apparent. By that time Micron stock will be significantly higher.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review hereThe Guide focuses on high total yield value stocks. Subscribers a two-week free trial.


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