MU with Nobias technology: Can Long-Term Demand Trends Help Micron Technologies Shares Overcome Short-term Guidance?
The supply chain issues and the semiconductor shortage has been one of the major storylines to come out of the COVID-19 pandemic. Not only have shortages in this industry hurt tech companies, but we’re seeing management teams across all sorts of industries and sectors mention chip shortages as headwinds due to the fact that in the digital age, it’s hard to buy any sort of product that doesn't involve computer chips. However, the supply/demand dynamics that tend to result in higher prices for many types of chips may not be helping Micron Technologies (MU). MU shares have fallen nearly 25% during the last 6 months, in large part due to concerns about softer pricing in the memory chip space. In short, MU’s products have become largely commoditized and it’s unclear if or when cyclical demand is going to turn in Micron’s favor.
Micron recently reported its fiscal 4th quarter earnings (on September 28th) and the results beat analyst expectations on both the top and bottom lines. MU’s revenue came in at $8.27 billion, which was up 36.5% year-over-year and ahead of the Wall Street consensus estimate by $60 million. MU’s non-GAAP earnings-per-share totaled $2.42, coming in ahead of estimates by $0.08/share. At first glance, the results were great. However, shares fell some 5% after the Q4 numbers were published. Why? Because of poor forward looking guidance.
Gerelyn Terzo, a Nobias 5-star rated analyst, recently published an article focused on MU’s Q4 results and which said, “The company’s guidance suggests that the good times, which have lasted for the past year, could be coming to an end for now.” MU management mentioned that it expects to see Q1 revenues come in at $7.65 billion, which is well below the Wall Street consensus of $8.49 billion.
Regarding the missed guidance, Terzo wrote, “Micron’s management team pointed to “supply chain challenges” that its PC customers are currently balancing. Micron’s revenue is diversified beyond just PC demand, but the company is still vulnerable to the ebbs and flows in demand, as its latest outlook has shown.” Terzo also points out that the macro economic environment isn’t being especially kind to high growth tech stocks, writing, “Rising yields are especially threatening to high-growth stocks including technology companies, as it throws a wrench into their future earnings potential based on analyst models.”
With specific regard to MU, Terzo said, “investors are disappointed about the short-term outlook. On the flip side, the company continues to generate billions in free cash flow, and Micron is a dividend-paying stock, which could help to soften the blow for investors.” In short, while the guidance is poor, there are certainly reasons why many investors remain bullish on MU shares. And, although it appears that MU is taking a very conservative route with regard to its sales expectations during the coming 3 months, we’ve seen several analysts who’re highly rated by the Nobias algorithm (4 and 5-star ratings) published bullish reports on MU recently. Therefore, we wanted to take a look at what those authors had to say coming into the Q4 results as investors decide whether or not MU’s most recent dip is one worth buying.
Supply chain constraints across the tech world are making it difficult for analyst firms to accurately predict hardware sales volumes; however, as Harsh Chauhan, a Nobias 5-star rated analyst points out in a recent Motley Fool article, “Memory industry research firm TrendForce estimates that the contract price of server DRAM could increase between 5% and 10% in the third quarter of 2021 due to a favorable demand environment. The PC market is going to be another tailwind for Micron as shipments are expected to increase 14% in 2021, according to IDC, which was originally expecting stronger growth of 18%. But supply constraints have forced IDC to temper its forecast.”
In short, while there is a lack of clarity moving forward, the overall trends still point in a positive direction. Chauhan makes this point by continuing, “strong PC demand is predicted to spill over into 2022 and beyond, with the market expected to record growth through 2025. TrendForce estimates that PC DRAM prices increased 3% to 8% quarter over quarter in the third quarter of 2021. The firm is forecasting a sequential decline in the range of 0% to 5% in the fourth quarter because of high channel inventory at PC original equipment manufacturers (OEMs), which reportedly have sufficient stock of DRAM. But the bigger picture appears bright, and PC DRAM prices could start moving north once the restocking begins.”
Lastly, Chauhan says that “mobile DRAM prices are expected to increase in the mid-single percentages in the final quarter of the year”, noting the tailwind created by the iPhone 13 launch, which should support memory chip prices in the relative near-term.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
All in all, Chauhan remains bullish on MU’s prospects. It’s true that memory chips are largely commoditized; however, he expects demand for newer, faster offerings to soar, which should protect MU’s margins. He wrote, “According to third-party estimates, the faster DDR5 memory could account for 10% of the overall DRAM market in 2022 and 43% in 2023. It is worth noting that the price of DDR5 memory is expected to be 30% higher than DDR4, driving the DRAM market's revenue higher in the process.”
Finally, he concludes that new demand from industries outside of the traditional CPU and handheld markets should help to bolster demand trends over the medium to long-term. Chauhan said, “Throw in the increasing memory capacities of 5G smartphones and the growing adoption of DRAM in markets such as automotive (where demand is anticipated to grow at 30% a year for the next three years), and the market Micron operates in is likely to stay healthy.”
The earnings growth potential that comes from these demand tailwinds, combined with MU’s relatively low price-to-earnings multiple (right now, shares are trading for just 7.8x expected fiscal 2022 earnings) creates an interesting opportunity for investors. Chauhan says that when you compare MU’s earnings multiple to the “S&P 500's multiple of nearly 22, the case for buying it becomes stronger.”
Overall, the credible author community that the Nobias algorithm tracks remains quite bullish on MU shares. 92% of Nobias credibly authors offer a “Bullish” outlook on MU shares. And, when looking at the opinions of the blue chip (4 and 5-star rated) Wall Street analysts that we track, we see that the average price target for MU shares is currently $100.00. Today, MU shares trade for 69.65, which means that this average price target points towards upside potential of approximately 43.6%.
Disclosure: Nicholas Ward has no MU position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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