Micron Q1 preview: Where next for MU stock?

When will Micron release Q1 earnings?

Micron will release second quarter earnings covering the three months to early November on Monday December 20.

Micron Q1 earnings preview: what to expect from the results

The global chip shortage has sent a wave of disruption upon all sorts of tech-heavy industries, but the story has been different for memory chips that are made by Micron. The company makes DRAM chips that temporarily store and crunch data and NAND chips that offer permanent storage on all sorts of devices from smartphones to computers.

They are one of several essential parts for hardware, alongside other forms of chips like Graphic Processing Units (GPUs) that provide visual displays and microprocessors that act as the central hub for controlling a device’s functions. These are the sorts of chips that companies have been scrambling for this year as a combination of higher demand for tech and constrained supplies thanks to Covid disruption causes a crunch. However, when companies that manufacture computers, smartphones and other devices saw a shortage on the horizon, they decided to hoard memory chips as a preventative measure. That led to record revenues and profits for Micron in the recently-ended financial year.

However, supply chains are only as fast as their slowest-moving component and, with manufacturers still struggling to get their hands on all the components they need, they cannot build as much hardware. This leaves them with an oversupplied inventory of memory chips that will not start to unwind until the wider chip shortage starts to ease in the second half of 2022, and could weigh on demand in the meantime – with Micron’s outlook coming in below expectations in the last quarter. This has also weakened the pricing power that Micron was able to wield last year when demand was high. But analysts hope that oversupply in memory chips will also start to correct itself in the latter half of 2022 as the shortage in other chips starts to improve, and that pricing pressure should unwind before the end of the financial year.

Ultimately, Micron recognises its in a segment of the semiconductor market that can prove more volatile but believes its position is continuing to gradually improve as more demand for memory chips comes from other applications rather than just computers and smartphones. In fact, chips sales for data centres overtook PCs for the first time this year as the cloud computing and related markets continue to boom, and demand is also rapidly growing in other areas including automotive and industrial equipment.

Micron has said revenue will be around $7.65 billion in the first quarter and Wall Street is forecasting sales will grow 33% to $7.67 billion from $5.77 billion the year before. Although strong, that will be down from the 36.6% growth delivered in the last quarter and mark the first slowdown in growth in over a year.

With that in mind, the outlook will be closely-watched. Analysts currently expect year-on-year revenue growth to slow to 16.5% in the second quarter and fall 2.1% in the third as it comes up against tougher comparatives, before starting to rebound with 8.5% growth pencilled in for the fourth.

Micron has guided for EPS of $1.90 to $2.10 in the first quarter and analysts expect adjusted EPS to jump to $2.11 from $0.78 the year before. Reported EPS at the bottom-line is set to follow higher to $2.03 from $0.71 last year. EPS growth is expected to accelerate in the second quarter before starting to slow in the second half, according to current consensus figures.

Where next for MU stock?

It has been a volatile year for Micron shares. The stock hit all-time highs in April of $96.75 before taking a gradual tumble to an 11-month low of $65.66 in October, and both can be treated as key levels to watch going forward. Micron shares have since rallied over 29% to $85.65, but have struggled to find higher ground in the past three weeks.

Micron currently trades at PE ratio of 16.7x based on its earnings in the financial year to the end of August 2021, and 10.1x based on forecasted earnings in the current year. That is considerably lower than other chipmakers including NVIDIA (79.6x based on forecasts for the year to January 31, 2022), AMD (58.2x on 2021 forecasts) and Broadcom (42x on 2021 results). The 15% rise experienced by Micron shares since the start of 2021 has also been unimpressive compared to soaring valuations earned by the broader chip market, with NVIDIA leading the charge with a 125% uplift this year. That is partly because the memory chip industry is regarded as more volatile than other aspects of the industry.

Over the longer term, the 41 brokers covering Micron shares have an average Buy rating on the stock and a price target of $100.71, implying there is 17% potential upside from the current share price.

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