Micron Earnings Prove Skeptics Wrong

Micron Technology, Inc. (Nasdaq: MU) shares traded 2.4 percent higher Wednesday morning after the company reported better-than-expected earnings and impressed Wall Street with its new guidance. Micron’s latest quarterly numbers suggest there is no end in sight for the memory chip “super-cycle” that has propelled Micron stock 106 percent higher in 2017.

Micron reported earnings per share, excluding items, of $2.45 on revenue of $6.80 billion. Both numbers topped consensus estimates of $2.19 and $6.41 billion, respectively.

In addition, Micron issued fiscal second-quarter revenue guidance ranging from $6.80 billion to $7.20 billion. The company expects adjusted EPS to range between $2.51 and $2.65. Analysts had been expecting $2.03 in EPS on $6.19 billion in revenue.

The boom in personal computing, smartphones and servers has created a favorable pricing environment for semiconductors. Micron’s fiscal first-quarter revenue jumped 71.4 percent compared to the same quarter a year ago. Micron says cloud and enterprise data center demand for DRAM chips remains strong.

Morgan Stanley analyst Joseph Moore says investors shouldn’t worry about the possibility that prices for the company’s NAND chips will fall.

“We remain convinced that NAND is moving from a period of shortage to a period of measured price declines, but would note that Micron is only 27 percent NAND at this point and has substantial levers to move NAND gross margins higher despite what is likely a tougher environment,” Moore says.

Throughout Micron’s impressive run, investors have maintained a some skepticism given the historically cyclical nature of the semiconductor market. But with Micron stock currently trading at an earnings multiple of only 4.5 based on its current run rate, Moore says the market is too pessimistic.

“Given our constructive view of DRAM, and our view that Micron can offset pressures in NAND as its competitive position improves, we do think that things are getting better, and still see material upside for the stock from here,” Moore says.

Credit Suisse analyst John Pitzer says investors are too preoccupied with the semiconductor market cycle.

“Memory remains the most structurally undervalued segment of semis, as investors have focused too much on the historical cyclicality and not enough on structural improvements: increasing capital intensity, new applications/workloads and a compute architecture that is fundamentally becoming more memory-intensive,” Pitzer says.

Morgan Stanley has…

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