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Micron Beats but the Shares Sink

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Micron Technologies (MU - Free Report) reported fiscal fourth quarter results on Thursday after the markets closed and initially appeared to deliver an excellent quarter.

MU posted net earnings of $3.53/share versus the Zacks Consensus Estimate of $3.32 and revenues of $8.44B – a 38% increase over Q4 2017. Full fiscal year results showed revenues up 50% and operating cash flow that more than doubled over fiscal 2017.

President and CEO Sanjay Mehrotra Commented “Micron delivered an exceptional fourth quarter and capped record fiscal year results by becoming the second largest semiconductor company in the U.S. In the fourth quarter, we set revenue records across all major markets, from automotive and industrial to mobile and cloud datacenters.”

Micron shares initially rallied in after-hours trade.

Then came the guidance.

Micron estimated that future quarterly revenue would likely be between $7.9B and $8.3B, short of the expected $8.45B. Future quarterly net earnings were predicted to be $2.87 - $3.02/share, below the high estimate of $3.08/share, though in line with the Zacks Consensus estimate for the current quarter of $2.88/share.

Micron also noted the potential impact of the most recent round of U.S tariffs which are set to start at 10% and go into effect on September 24th and will increase to 25% at the beginning of 2019 if a trade agreement with China is not reached by then.

On the investor conference call, Micron CFO David Zisner noted that gross margins will be impacted in the near term and that “We are working to gradually mitigate most of the impact from these tariffs over the next three to four quarters. Clearly, tariffs are affecting us, probably to the tune of 50 to 100 basis points. We are working on steps to mitigate that. That obviously takes time.”

Micron also confirmed that PC processor shortages could hurt demand for memory chips. It had been previously reported that a manufacturing change at Intel (INTC - Free Report) could potentially slow production of the company’s CPUs, which could slow global production of PCs, hurting the sales of makers of other components, like Micron.

Micron has already see a number of analyst downward revisions lately, resulting in a Zacks Rank #5 (Strong Sell).

Micron had been one of the best semiconductor stock performers early this year, at one point up 50%, though recent cautiousness about weak pricing and oversupply in the DRAM space has seen share prices retreat throughout the summer. Pessimism about the CPU shortage and the effect of tariffs are hurting the stock even more. Micron is trading $44.75/share at midday Friday, down nearly 3%.

The Intel CPU issue will sort itself out with time. Though it may affect sales in the next quarter or two, any temporary slowdown will likely be made up in subsequent periods. A quarter can seem like an eternity for public companies, but this problem is unlikely to materially change global demand for PCs in the long term.

The tariff issue is potentially more troubling. Companies like Micron are skilled at adapting to changes, including in the landscape of international trade. Large-scale changes in sourcing materials and moving manufacturing don’t happen overnight however - and in fact can take years.

With knowledge of what the tariff situation will be, Micron can make an informed financial decision about how best to respond. As the tariff situation changes over days and weeks, those companies are forced to guess what trade will look like in the coming years.

Obviously, whether tariffs will be zero, 10% or 25% over the next few years will have a huge impact on how companies plan for the future. Unfortunately, as this trade war plays out, they’ll have to continue guessing for the time being.

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