Micron Stock: Can Micron Deliver 6x Earnings Growth?

Micron Technology Inc stock could face headwinds from the changing demand dynamics in NAND business.

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After doubling for the year, Micron Technology Inc (NASDAQ:MU) stock has seen some profit booking which has dragged the stock lower. The recent sell-off in tech stocks has aggravated the slump in Micron stock. Micron stock is down over 16% in the last five trading session. Micron technical charts show that MU stock has made a bearish crossover with the 20-day moving average line which had provided strong support to the stock in the past few months. MACD also turned bearish. However, the stock has found support from its 50-day moving average. If the stock breaches this support line, it could go much lower heading into its first-quarter fiscal 2018 earnings.

Micron has delivered strong revenue and profit growth.

Micron is expected to report its Q1 earnings in next couple of weeks. And analysts are expecting the strong performance from the earlier quarters to continue. In the previous quarter, Micron revenues had grown by 90% YoY while earnings multiplied by a whopping 13x YoY. The company had posted similar results in the third quarter of the FY 2017 as well. All in all, driven by pro-cyclical factors in memory chip market, Micron has been delivering strong performance on most of the financial metrics for several quarters now.

Micron saw its gross margin improve from 18% in Q4 2016 to 50% in Q4 2017, more than 2.5x improvement. Profit margin improved from negative 5% to 39% in the same period. The company also saw its efficiency ratios go up. Asset turnover ratio improved from 0.47 to 0.71. The strong performance on efficiency, growth and profit numbers translated into a solid improvement in the company’s return on equity numbers. Return on equity saw a multifold jump from negative 5% in Q4 FY 2016 to 52% in the Q4 FY 2017, more than 10x improvement in one year. On the other hand financial risk declined. Debt to equity ratio was down 0.76 in Q4 2016 to 0.57 in Q4 2017. This all-around improvement was behind the massive rally in Micron stock.

Analysts expect strong performance from Micron.

Analysts continue to expect similar performance in the current quarter from Micron. Wall Street estimate calls for 61.4% YoY revenue growth in the November ending quarter. The expectation on earnings front is even higher. Analyst consensus is for the company to report non-GAAP EPS of $2.19, a massive 584% growth from the last year same quarter. So, why so high expectations from the company?

The memory chip market has been in a tight supply as demand continues to exceed the supply over the past year or so as mobile, server, and automotive demands for DRAM have been growing rapidly. This has driven the prices of both NAND and DRAM chips higher. Micron Technology makes its money mainly from DRAM and NAND storage. The memory supply had been tight in the previous quarter too, which will benefit the company.

Demand-supply dynamics is changing.

However, the situation is likely to change to some extent. Keybanc analysts Weston Twigg said in a report that he expects a material decline in NAND prices by mid-2018. And he was not alone. In a recent report, Morgan Stanley stated that it expects the demand pressure in NAND segment to reverse advising investors to limit its exposure to Samsung and Western Digital (NASDAQ:WDC), companies highly dependent on NAND business. However, it was bullish on the DRAM segment. Micron also estimates that demand for DRAM will grow by 20% annually from 2016 to 2020. This trend is likely to benefit the company greatly, as it makes roughly two-thirds of their revenue from DRAM sales. However, the price drop is to likely act as a headwind in the near term for Micron. Investors must exercise caution going into the earnings. The expectations from Micron is high. Given the massive rally, any disappointment in the earnings could lead to a sizeable correction in the stock which could be a good entry point for long-term investors.

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