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Micron's Raised View Fails to Impress Investors: Here's Why

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It seems that Micron Technology Inc. (MU - Free Report) is expecting an outperformance in its quarterly results as reflected in its updated guidance for the first quarter of fiscal 2017 at the Credit Suisse Technology Conference held yesterday. The memory chip manufacturer revealed some of its conference details in a filing with the Securities and Exchange Commission (SEC).

Updated Guidance

Per the filing, Micron now expects its first quarter results to meet or come above the higher-end of the previously announced guidance range. The optimistic guidance is driven by improvements in average selling prices (ASP), particularly for DRAM. Apart from this, the company also revealed that overall demand continues to be healthy while it forecasts slowing industry supply growth for the next few quarters.

Micron now anticipates revenues for the first quarter to be approximately $3.978 billion (plus/minus $50 million), which is much above its previous guidance range of $3.55 billion to $3.85 billion. The company’s new revenue guidance is also way ahead of the Zacks Consensus Estimate of $3.73 billion.

Earnings are now projected to be about 28 cents per share (plus/minus a few cents) compared with its earlier guidance range of 13 – 21 cents. The Zacks Consensus Estimate is currently pegged at earnings of 19 cents.

Further, the company projects gross margin to be around 25.5% (plus/minus 0.5%) in the first quarter, which matches the higher-end of the previously provided guidance range of 23% to 25.5%.

Talking about its pending acquisition of Inotera, Micron revealed that it is on track to complete the same by Dec 6. Considering the current market conditions, the company anticipates the buyout to be immediately accretive to its DRAM gross margin, earnings per share and free cash flow.

Additionally, Micron believes that the acquisition will also have some operational benefits, leading to efficient management of investment levels and cadence and alignment with global manufacturing operations.

Going forward, the company anticipates the aforementioned factors to also have a positive impact on its second-quarter fiscal 2017 results.

Upbeat Guidance Failed to Please Investors

Generally, investors tend to react optimistically following an upbeat guidance leading the shares higher. But this didn’t happen in the case of Micron. The memory chip maker’s shares closed at $19.42 yesterday, down approximately 2.9%.

It should be noted that over the past few months various sources have revealed that DRAM and NAND prices have been improving primarily due to a better product mix optimization and stronger-than-expected demand for PCs, servers and mobiles. Therefore, in our opinion, as investors are already aware of the driving factors, they have already adjusted their positions in the stock.

Moreover, investors may have restrained themselves from being too optimistic about the upbeat guidance due to the fact that the company’s share price has already more than doubled from its 52-week low level of $9.31 attained on Jan 20, 2016.

These factors might have been the reason behind the absence of any upward movement in Micron’s during yesterday’s trade.

Our Take

Micron offers both DRAM and NAND products. DRAM chips are a key component in PCs, while NAND flash chips are critical for portable electronic devices. The improving prices for DRAM and NAND chips make us optimistic about the company’s near-term performance.

It should be noted that Micron has been expanding in the SSD storage market due to the decline in the PC market. SSDs are faster and more energy efficient than traditional hard drives. SSDs are also being used in servers due to lower latency, which in turn, facilitates faster response to real-time applications.

In an effort to expand its SSD product portfolio, last year, the company partnered with Seagate Technology plc (STX - Free Report) to supply a significant portion of the latter’s NAND requirement. In return, Seagate shares its SAS SSD – a key technology that Micron lacks in the enterprise SSD market. We believe that the deal will expand Micron’s high-value enterprise SSD portfolio.

Therefore, although Micron’s shares did not see positive movement during yesterday’s trade, looking at improving selling prices for DRAM and strategic initiatives of expanding in the SSD market we consider that the stock is worthy of remaining in investors’ portfolio. The stock currently carries a Zacks Rank #2 (Buy).

A couple of other stocks worth considering in the broader technology sector are Cirrus Logic Inc. (CRUS - Free Report) and FormFactor Inc. (FORM - Free Report) , both sporting a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Cirrus Logic has witnessed upward estimate revisions in the last 60 days and has surpassed the Zacks Consensus Estimate thrice in the trailing four quarters with an average positive surprise of 53.68%.

Estimates for FormFactor also moved up in the last 60 days. It has surpassed the Zacks Consensus Estimate thrice in the trailing four quarters with an average positive surprise of 21.97%.

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