Micron (MU - Free Report) shares have skyrocketed roughly 60% in 2019 to crush the broader semiconductor market’s 26% climb and the S&P 500’s 18.5%. Clearly, Wall Street seems pleased with Micron’s story at the moment, despite recent quarterly sales declines. The question is should investors consider buying Micron stock with the chipmaker set to report its quarterly financial results on Thursday, September 26?
Micron & Industry Overview
Micron is one of the largest makers of DRAM and NAND memory chips. DRAM chips are used in personal computers and servers, while NAND is flash memory used in smartphones and solid-state hard drives. Like its peers, Micron is subject to the cyclical nature of the semiconductor industry.
Chipmakers are beholden to broader spending cycles. Plus, a run of outsized success created difficult-to-compare periods, which put many semiconductor firms, especially MU, in a tough spot over the last several quarters. On the more Micron-specific side, NAND and DRAM pricing is down, as is demand from smartphone makers and others—which has hurt pricing.
The ongoing U.S.-China trade war has also negatively impacted MU. Chief Executive of the Boise, Idaho-based firm, Sanjay Mehrotra, pointed to some positives last quarter but remained cautious. “While we are seeing early signs of demand improvement, we plan to reduce our capital expenditures in fiscal 2020 to help improve industry supply-demand balance,” Mehrotra said in prepared remarks.
Nonetheless, the chip business is set to play a pivotal role in our ongoing technological revolution. Global tech titans Apple (AAPL - Free Report) , Microsoft (MSFT - Free Report) , Google (GOOGL - Free Report) , and Amazon (AMZN - Free Report) all rely on chips, and everything from cloud computing to artificial intelligence are dependent on semiconductors.
As we mentioned at the top, shares of Micron have soared so far this year, as have many other chipmakers, including AMD (AMD - Free Report) and Nvidia (NVDA - Free Report) . Meanwhile, industry heavyweight Intel (INTC - Free Report) is up just 10% in 2019. However, investors need to put 2019’s stellar run into context. Shares of MU are up just 12% over the last 12 months and its industry has climbed only 4.5%.
Therefore, a fair amount of Micron’s comeback can be attributed to its massive second-half of 2018 selloff. In fact, Micron stock tumbled from just over $60 per share in early June 2018, to roughly $30 in December.
If we look back further, investors will see that MU stock has lagged the industry over the last five years. But it is worth pointing out that MU stock is up over 520% in the past decade. This blows away the semiconductor industry’s 275%.
Moving on, Micron’s forward 12-month price/sales ratio currently rest at 2.9. This marks a discount against its industry’s 3.4 average. However, the company’s strong 2019 run has pushed its P/S ratio to its highest point over the last 24 months, and well above its 1.9 median over this stretch.
MU stock is trading at its highest point in five years right now, in terms of forward sales—as is the industry, which could signal that the comeback is getting far too overheated at this point. Micron is also trading right near its five-year high in terms of forward 12-month earnings estimates at 20.1X, which comes in well above its industry’s 15.1X.
Worse yet, Micron was trading at just 6.5X forward earnings estimates as recently as June. MU stock is up a whopping 55% since it reported its Q3 fiscal 2019 results on June 25. Clearly, this has put pressure on its P/E ratio, but there is more to the story.
Q4 Outlook & Beyond
Last quarter, Micron’s revenue tumbled 38.6%, which was far worse than Q2’s 20% downturn. The declines can be blamed both on tough comparisons and rough business conditions. Looking ahead, our current Zacks Consensus Estimate calls for Micron’s Q4 fiscal 2019 revenue to plummet 46.5% from $8.44 billion in the prior-year quarter to hit $4.51 billion.
Meanwhile, MU’s full-year sales are projected to fall around 25% from $30.39 billion in 2018 to $23.08 billion. It is worth pointing out that Micron’s sales soared 50% in 2018. Still, a jump back to those levels doesn’t appear to be in the cards, yet.
Peeking ahead to the first quarter of fiscal 2020, the chipmaker’s sales are once again expected to tumble, this time to the tune of a 40.5% decline. Full-year fiscal 2020 revenues are projected to sink nearly 16% below our current year estimate to touch $19.45 billion—which would sink underneath fiscal 2017’s $20.32 billion.
At the bottom end of the income statement, Micron’s adjusted Q4 earnings are projected to fall 86%, with fiscal 2019 projected to sink approximately 48%. As some might have guessed based on our top-line estimates, Micron’s fiscal 2020 earnings are projected to sink another 59%.
Micron is a Zacks Rank #2 (Buy) at the moment, based largely on its recent positive earnings estimate revision activity. Investors should note, however, that the recent earnings trends still represent downturns from where analysts had expected MU’s earnings to be just 90 days ago—but up post Q3.
On the positive side, Micron is likely poised to return to growth in the next few years and another round of trade talks are scheduled for early next month. Yet, given Micron’s current outlook, stretched valuation, and the fact that it sits right near its 52-week highs, investors might want to stay away from MU stock—at least until after it reports.
Micron has also historically traded heavily around earnings, which means a post-earnings selloff could be due. But you never know how Wall Street will react.
Micron reports its Q4 2019 financial results on Thursday, September 26.
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