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Buy Micron (MU) Ahead of Q1 Earnings as Stock Reaches New High?

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Micron (MU - Free Report) will report its first quarter performance of fiscal 2020 after the market closes on Wednesday, December 18. Micron has been on a tear in 2019, up over 70%.

Micron stock also hit a new 52-week intraday high Monday of $54.30 per share. With the momentum that Micron has generated in 2019, can the company add to its run with a boost from its Q1 report?

Memory Chip Market Looks to Stabilize

Micron has been on a roller coaster ride the past couple years as the weak demand for memory chips and macroeconomic headwinds sent shares tumbling in closing months of 2018. An excess global supply of NAND and DRAM memory chips was driven by the soft demand for PCs and mobile devices.

NAND prices gradually stabilized in the second half of 2019, and some analysts expect DRAM prices to recover next year. The heightened outlook for the memory chip market has helped chip makers like Micron gradually recover.

Micron generates most of its revenue from memory chips. Last quarter, 63% of its revenue came from DRAM chips and 31% came from NAND chips.

Despite the uptick in the demand and prices for memory chips, Micron is coming off a fourth quarter where its sales fell 42% from the year-ago quarter. Plus, its earnings declined a staggering 86%. The weak quarterly performance sent MU stock down over 11%, but its shares have gradually recovered since then.

Company Outlook

New tech areas like 5G communications are forecasted to help create increased demand in the memory chip market in the years ahead.

However, investors should note that the memory industry is notoriously cyclical, and supply and demand can get out of balance at times. In addition, Micron’s heavy dependence on its DRAM chips could potentially be detrimental to the semiconductor firm. Since 2005, Micron has experienced only four years of rising DRAM prices, which has helped spur the volatility the stock has seen in recent years.

An escalation of the trade war could deteriorate the macroeconomic environment and derail the demand side of the equation for the DRAM industry, which would prevent the rebound in prices or even cause declines.

Micron’s diversification in the AI space could be a strong move down the road. In 2018, the company dedicated $100 million to funding early-stage AI start-ups, and in October it acquired FWDNX, which is a developer of software and hardware accelerators that speed up AI processes.

Our Zacks estimates forecast the memory chip manufacturer’s Y/Y declines to continue in its upcoming report. Consensus estimates for Q1 project earnings to decline over 83% to $0.49 per share and for net revenue to drop 36.6% to $5 billion.

Looking ahead to Micron’s fiscal 2020 projections, our estimates anticipate the firm’s bottom line to fall over 62% to $2.36 per share and for the top-line to slip 13.3% to $20.3 billion.

Bottom Line

Micron hopes to reap the benefits of a potential rebound in the memory chip market, but the recovery in the industry isn’t guaranteed. In addition to the uncertainty, Micron has struggled to gain financial traction as its top and bottom line declines have steepened.

Despite the uncertainty of the rebound and the declines in sales and earnings, investors have still banked on a of memory chip rebound, which has driven MU stock in 2019.

Micron currently trades for about 18.9X its forward earnings, which is just slightly above the industry average of 16.7X forward earnings. Micron also doesn’t pay a dividend, which may make it an even riskier investment if the market rebound doesn’t pan out.

Investors looking to for a pipeline to the semiconductor industry could be better off considering other dividend-paying chip makers like Intel (INTC - Free Report) or Nvidia (NVDA - Free Report) . And Micron’s earnings estimates have been revised lower, helping MU earn a Zacks Rank #4 (Sell).

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