Micron Technology Stock: Brace For Earnings (NASDAQ:MU)

Micron Technology, Inc. (NASDAQ:MU) is set to release earnings on Thursday, and the stakes couldn’t be higher. Not only will the release tell us whether MU will beat its already-tepid guidance, it will also tell us many things about the tech sector overall. Micron is a huge supplier to big tech companies like Apple Inc. (AAPL), so if Micron’s sales are weak, then it could bode poorly for much larger companies, creating ripples across the market.

Things are already pretty tense in the tech sector. A day before this article published, Bloomberg penned an article saying that Apple had planned to cut its iPhone production. The article did not cite a specific source but claimed that a person “close to the matter” had given the information to Bloomberg reporters. That was enough to trigger significant selling in Apple stock pre-market.

Micron, too, was hit in the pre-market selling. As of this writing (about 7 Eastern on Wednesday), the stock was down 1.66% ahead of market open. By the time you read this article, you’ll get to see how it all played out but, basically, it looks like it’s going to be a down day for Micron.

Here’s the thing, though:

All of this pre-market selling in Micron, Apple, and related stocks is happening because of a single news report. There have been no official company reports confirming what the unnamed Apple-leaker is saying. Therefore, the news report does not qualify as “material” (i.e., pertinent to reported financial performance).

When Micron’s earnings release comes out, investors will get something material to chew on. In its previous release, Micron forecast an extreme decline in both revenue and earnings. It guided for $7.2 billion in revenue (plus or minus $400 million), down 16.7% from Q3, and $1.52 in EPS, down 41.3% from the prior quarter. This was all attributed to weakening demand for DRAM and NAND flash chips, which tech companies now have in excess quantities due to an industry-wide slowdown.

Online memory price websites confirm that what Micron predicted is happening. As of this writing, DRAMeXchange was showing a -0.98% session price change for two 8-gig sticks of DDR4 2666 RAM. All other types of RAM sampled showed declines as well.

Based on virtually every memory component on earth going down in price, we would expect Micron’s revenue to decline. The question is, “by how much?” Micron’s guidance was for $7.2 billion in sales, which is down from last quarter, but still up from early 2021 quarters. If Micron meets its Q4 revenue targets, then its long-term growth trend is still intact. Micron was doing just $6 billion in revenue in the first quarter (fiscal second quarter) of 2021. In that period, the company’s stock price ranged from $77 to $92. Today it trades for $50 and is expected to do over $7 billion in sales. If Micron just hits its guidance, then there’s a chance that investors will take the release well.

However, there’s a lot of risk here for the more short-term-minded among us. Micron’s guidance gave a wide range of possibilities (for example, revenue plus or minus $400 million). If Micron comes in on the lower end of its guidance, then its release won’t be taken well. Trying to “play” this release as a day trade probably isn’t a good idea.

There are also some long-term risks to keep in mind, such as increased competition from China-already a factor in NAND Flash, possibly coming to DRAM next. Investors will want to keep these risks in mind, as Micron has always made for a bumpy ride. For me personally, though, I’m comfortable being long MU. The stock is outrageously cheap (perhaps the cheapest in the entire U.S. tech sector) and its fundamentals could pick up in the next stage of the business cycle.

Micron’s Competitive Position Points to a Solid Medium-Term Outlook

Micron Technology has an interesting competitive position in that it technically has no moat (i.e., factor keeping competitors at bay), but it still faces little competition in its most lucrative market. DRAM is an oligopoly, which means that a few firms dominate the entire space. Specifically, Micron, Samsung (OTCPK:SSNLF, OTCPK:SSNNF), and SK Hynix. Oligopolies have more price competition than monopolies, but the firms in the oligopoly are relatively secure in their competitive positions. NAND is a much more competitive space than DRAM, with slimmer margins. This is confirmed by Micron’s own earnings results: DRAM makes up the overwhelming majority (75%) of the profits.

The big thing you want to look out for long term with Micron is new competition. The memory industry has benefitted from consolidation over the last few decades, and that’s reduced competitive pressures. The end result is juicier margins. In 2019, Micron bought FWDNXT, which increased its neural network and machine learning capabilities. Thanks to that acquisition, Micron is supplying specialized memory for AI projects. Micron doesn’t say exactly how much profit its acquired companies have brought in, but as a general economic principle, fewer competitors usually means higher margins.

Nevertheless, DRAM and NAND Flash are both commodities. Buyers (like smartphone manufacturers and data centers) view the various suppliers’ products as largely interchangeable. Micron is working on differentiating its offerings, and it has 50,000 patents to prove it, but the big buyers still see these companies’ offerings as the same. For this reason, DRAM prices tend to go down when companies like Apple are holding too much of it.

Which takes us to today. RAM prices have been in a downtrend all year, and the trend shows no signs of slowing down. If Bloomberg’s story about Apple’s sagging iPhone demand is correct, then that’s a lot of cancelled orders that will reduce memory demand. In this kind of environment, you’ve got to expect that companies like Micron will see their revenue decline over the short term.

The Case for Bullishness

Despite all that I wrote about DRAM prices, I personally am long Micron and I have no plans on exiting the position anytime soon. The thing is that all of the factors I mentioned are short-term factors. Micron is still very well positioned for the long run. Its industry only has three main players, which means that the three get to divide the entire DRAM market between them when times are good. Right now, we are in an economic contraction, characterized by falling demand for consumer tech. In the immediate term, this is bad for Micron, but the industry dynamics point to the possibility for continued growth in the next economic expansion. Economics teaches that markets go through a predictable business cycle wherein a contraction is followed by an expansion. When you’re in a contraction, it can feel like the world is ending, but historically, contractions are usually followed by growth. When the next economic expansion and uptick in consumer spending hits, Micron will be ready to ramp up production.

Another reason I’m bullish on Micron is its valuation. Using trailing 12-month earnings, Micron stock is truly dirt cheap-easily one of the cheapest stocks in all of U.S. tech. According to Seeking Alpha Quant, it trades at:

• 5.7 times earnings.

• 1.75 times sales.

• 1.13 times book value.

• 3.65 times operating cash flows.

The book value multiple is particularly astonishing. When a stock is trading at 1.13 times book value, then it only has to fall 11.6% to be trading for less than the value of its assets, net of debt. A stock that is cheap theoretically doesn’t even need growth to be worth more than what it trades for in the markets. In the event of liquidation, it could pay investors off and then some.

Micron Technology also stacks up pretty well in a discounted cash flow (“DCF”) model with conservative assumptions. It’s so cheap, in fact, that you don’t even need to assume a period of high growth to get a fair value estimate above the current stock price. The terminal value alone is higher than the stock price!

Here’s how I worked that out:

Micron estimates that it will earn $1.52 in EPS in the upcoming quarter. Let’s assume earnings never grow from that level, leaving $6.08 in annual earnings in perpetuity. If you discount that at 6%, you get a fair value estimate of $101.88. All of this factors in the damage that investors expect in Q4: the model assumes that earnings will fall, and then stay at a permanently lower level. Still, it ends up showing 100% upside. If Micron actually does start growing again, then the potential appreciation will be really extreme.

The Bottom Line

The points raised in this article serve to illustrate why Micron Technology remains a good long-term bet. Sure, it’s volatile, it’s in a cyclical downturn, and it’s not in fashion, but it’s precisely for these reasons that Micron is worth looking at. The bearish trends affecting the memory market right now might look scary under a microscope, but zoom out, and you’ll see that we’re merely in the trough of a long-term business cycle. Micron’s long-term prospects look great.