Reminiscence chip producer Micron Expertise (NASDAQ: MU) will report its fiscal fourth-quarter outcomes as we speak after the market closes. The inventory has been hammered in current months as considerations about reminiscence oversupply started to proliferate. The corporate ought to nonetheless produce near-record outcomes for the fourth quarter, however earnings might begin to fall subsequent 12 months if reminiscence chip costs do not maintain up.

What occurred final time

Whereas common promoting costs for Micron’s NAND chips dipped within the third quarter, DRAM costs rose by greater than 30% 12 months over 12 months. This sturdy DRAM pricing together with double-digit gross sales quantity progress for each kinds of reminiscence chips helped Micron surpass analyst expectations.

Metric

Q3 2018

Yr-Over-Yr Change

In comparison with Common Analyst Estimate 

Income

$7.80 billion

40%

Beat by $50 million

Non-GAAP earnings per share

$3.15

94.4%

Beat by $0.03

Information supply: Micron.

A Micron solid-state drive.

Picture supply: Micron.

What analysts predict

For Micron’s fiscal fourth quarter, analysts predict Micron’s strong progress to proceed:

Metric

Common Analyst Estimate

Yr-Over-Yr Change

Income

$8.25 billion

34.4%

Non-GAAP earnings per share

$3.34

65.3%

Information supply: Yahoo! Finance.

A slew of downgrades

Whereas analysts are optimistic about Micron’s fourth quarter, many have began to slash their worth targets on the inventory as a consequence of fears of reminiscence chip oversupply. Micron has already began to really feel NAND worth declines, and DRAM worth declines may very well be within the playing cards for 2019. Micron inventory has tumbled round 25% from its current excessive, partially as a consequence of these analyst downgrades:

  • Aug. 9: Morgan Stanley lowered its ranking on your entire semiconductor business to cautious. MS is frightened about rising chip-inventory ranges and indicators of the market overheating.
  • Aug. 15: Wells Fargo maintains an outperform ranking on Micron inventory, however lowered its worth goal from $70 to $63. The financial institution continues to be optimistic, although, and analyst Aaron Rakers believes the valuation is enticing.
  • Sept. 6: Baird eliminated Micron as a high semiconductor large-cap concept whereas slashing its worth goal from $100 to $75. Baird analyst Tristan Gerra pointed to NAND oversupply, peaking gross margins, and the prospect of DRAM worth declines in 2019.
  • Sept. 11: RBC Capital dropped its worth goal on Micron inventory from $83 to $70 in anticipation of headwinds from the reminiscence cycle. Analyst Amit Daryanani expects DRAM costs to weaken subsequent 12 months.
  • Sept. 12: Goldman Sachs knocked down its ranking on Micron inventory from purchase to impartial. Analyst Mark Delaney sees weak point in NAND and DRAM fundamentals, and he factors out that downturns are sometimes worse than buyers initially anticipate.
  • Sept. 14: Macquarie lowered its Micron worth goal from $80 to $70.
  • Sept. 17: Deutsche Financial institution dropped its Micron worth goal from $80 to $60 however reiterated a purchase ranking. The financial institution lowered its 2019 estimates to consider weaker costs for NAND and DRAM chips. Deutsche now predicts earnings per share in 2019 will probably be 20% decrease than beforehand anticipated.
  • Sept. 17: BMO Capital Markets reiterated a market carry out ranking however lowered its Micron worth goal to only $45. Analyst Ambrish Srivastava expects downward estimate revisions to proceed as DRAM pricing weakens.

Not everybody turned extra detrimental on Micron prior to now few months. Analysts at Financial institution of America Merrill Lynch stored its $100 worth goal on the inventory after current constructive conferences with Micron’s rivals and gear distributors. And hedge fund supervisor David Tepper mentioned he stays “very, very long” Micron on CNBC, citing sturdy long-term demand tendencies.

Whereas there is no consensus on how dangerous the subsequent downturn in reminiscence chip costs will probably be, analysts are beginning to line up behind the view that Micron could have a harder time subsequent 12 months.

The outlook is vital

Micron will very doubtless give you spectacular fourth-quarter numbers, however buyers ought to pay extra consideration to what the corporate says about fiscal 2019. Micron was overly optimistic previous to the final downturn in 2016, saying on the finish of 2015 that provide and demand was anticipated to stay balanced the next 12 months. That turned out to be utterly incorrect.

Micron is once more optimistic as we speak, asserting a large $10 billion buyback earlier this 12 months at what may very well be the height of this reminiscence chip cycle. If Micron begins to melt its language round 2019 expectations, that might be an indication the corporate is seeing the identical points that the majority analysts at the moment are seeing.

With Micron shares down a lot over the previous few months, the inventory might swing wildly if Micron’s outlook both misses or beats expectations. Whereas the inventory seems to be extraordinarily low cost primarily based on present earnings, buyers should not low cost the potential of a steep earnings decline subsequent 12 months.

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Timothy Inexperienced has no place in any of the shares talked about. The Motley Idiot has no place in any of the shares talked about. The Motley Idiot has a disclosure coverage.