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Why Is Micron (MU) Down 2.8% Since Last Earnings Report?

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A month has gone by since the last earnings report for Micron (MU - Free Report) . Shares have lost about 2.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Micron due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Micron Reports Q3 Results

Micron reported stronger-than-anticipated results for third-quarter fiscal 2020. The company’s fiscal third-quarter non-GAAP earnings per share of 82 cents beat the Zacks Consensus Estimate by 5.1% and surpassed its guided range of 75-80 cents as well. Nonetheless, non-GAAP earnings registered a year-over-year decline of 21.9%.

Quarterly revenues of $5.44 billion outpaced the consensus mark of $5.32 billion and increased 13.6% from the year-ago quarter’s $4.79 billion. The memory chip maker’s revenues also came in line with the higher-end of management’s guided range of $5.2-$5.4 billion.

Revenue Details

DRAM revenues of $3.59 billion, accounting for 66% of total revenues in the fiscal third quarter, grew 5.6% year over year and 16.3% sequentially. Bit shipments rose nearly 10%, sequentially. On a sequential basis, ASP increased in the mid-single-digit percentage range.

NAND revenues of $1.67 billion, representing 31% of the total top line, were up 50.8% on a year-over-year basis and 10% quarter on quarter. While NAND ASP increased in the upper single-digit percentage band, shipment quantities grew in the low-single-digit percent range sequentially.

Business-unit wise, revenues of the computing and networking business (CNBU) unit grew 7% from the year-ago quarter and 13% sequentially to $2.22 billion. This sequential growth was mainly driven by stronger demand for data-center products and double-digit quarter-over-quarter pricing improvements. Quarter-on-quarter growth was partially offset by supply-constraint for certain compute DRAM products, which limited the company’s ability to meet some demand.

Revenues of $1.53 billion from the Mobile Business Unit (MBU) climbed 30% on a year-over-year basis and 21% sequentially. This sequential growth was mainly driven by solid bit shipment growth in Micron’s LPDRAM product.

The Embedded Business Unit revenues logged $675 million, down 4% from the year-ago quarter and 3% from the previous quarter, primarily due to reduced demand from the automotive sector.

Revenues from the Storage Business Unit (SBU), comprising SSD NAND components and 3D XPoint totaled $1.01 billion, up 25% year over year and 17% sequentially. This sequential growth mainly resulted from improved pricing and increased data-center SSD demand.

Margins

Micron’s non-GAAP gross profit of $1.8 billion declined 4.2% from the prior-year period, but increased 29% sequentially. Non-GAAP gross margin slipped from 39% in the year-ago quarter to 33%. However, gross margin expanded 400 basis points (bps) sequentially.

Underutilization charges at the Lehi Lab had a negative impact of nearly $155 million of 285 bps. Nonetheless, sequential growth in gross profit and margin was chiefly aided by increased pricing at both DRAM and NAND, and improvements in product mix.

Micron’s non-GAAP operating income of $981 million declined from the year-ago quarter’s $1.11 billion. Non-GAAP operating margin contracted from 23% to 18%. However, on sequential basis, non-GAAP operating profit and margin improved 81% and 700 bps, respectively.

Balance Sheet and Cash Flow

The company exited the reported quarter with cash and short-term investments of $8.66 billion compared with the $7.5 billion recorded at the end of the prior quarter.

Micron’s long-term debt increased to $6.36 billion from the $5.2 billion witnessed at the end of the fiscal second quarter.

The company generated operating cash flow of $2 billion during the fiscal third quarter and free cash flow of $101 million. In the first nine months of fiscal 2020, the company generated operating and free cash flows of $6.04 billion and $250 million, respectively.

The company repurchased shares worth $40 million in the reported quarter. During the first three quarters of fiscal 2020, Micron repurchased $134 million worth of its common stocks.

Guidance for Q4

Buoyed by the better-than-expected quarterly results, Micron has issued an upbeat guidance for the fiscal fourth quarter. The company anticipates revenues of $5.75-$6.25 billion (mid-point $6 billion) for the quarter.

For the fiscal fourth quarter, Micron expects non-GAAP gross margin of 35.5% (+/- 150 bps). The company estimates higher underutilization charges due to contracted production volumes of approximately $135 million in the quarter to hurt the gross margin.

Operating expenses on a non-GAAP basis are likely to be $850 million (+/- $25 million).

Earnings per share are anticipated to be $1.05 (+/- 10 cents).

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 43.8% due to these changes.

VGM Scores

At this time, Micron has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Micron has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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