Micron Technology Inc. faces many questions when it reports earnings, with the most important focusing on concern that memory-chip prices have wandered too high even amid continued strong demand from data centers.
Micron MU, -1.61% is expected to report earnings after the bell on Wednesday. The stock has been volatile in the quarter after a massive run-up as optimism about high memory-chip demand, and the high prices that result, competes with skepticism that the good times can keep going even with regulatory rumblings from the industry’s biggest customer.
Chinese regulators launched a probe into memory chip makers like Micron, Samsung Electronics Co Ltd. 005930, -1.14% and SK Hynix Inc. 000660, +0.81% earlier this month. That followed reports that China —which accounts for about a quarter of the world’s demand — had met with executives at Micron to talk about reining in the growing price of memory chips.
Micron shares fell recently following a downgrade from Morgan Stanley that said that any erosion in fundamentals would be a negative for the stock, which had been trading at its highest levels since the dot-com bust. That rally had been fueled in part by Micron’s investor day, which included the announcement of a $10 billion share buyback plan and a raised outlook.
Here is what to expect.
Earnings: Of the 26 analysts surveyed by FactSet, Micron on average is expected to post adjusted earnings of $3.12 a share. Micron forecast third-quarter earnings of $3.12 to $3.16 a share, up from its previous forecast of $2.76 to $2.90 a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $3.16 a share on average.
Revenue: Wall Street expects revenue of $7.75 billion from Micron, according to 25 analysts polled by FactSet. Micron expects revenue of $7.7 billion to $7.8 billion, up from its previous forecast of $7.2 billion to $7.6 billion. Estimize expects revenue of $7.76 billion.
Analysts expect sales of DRAM, or dynamic random access memory, the type of memory commonly used in PCs and servers, to jump 54% to $5.48 billion. Wall Street forecasts a 7% rise in sales of NAND chips, the flash memory chips that are used in USB drives and smaller devices such as digital cameras, to $1.96 billion.
Stock movement: Even with the surge over the quarter, Micron shares are only up about 3% since the company’s last earnings report, compared with a 4% rise in the PHLX Semiconductor Index SOX, -0.08% and a 5% gain in the S&P 500 index SPX, -0.10% Over the past 12 months, Micron shares are up 92%, while the SOX index is up 30% and the S&P 500 is up 14%.
What analysts are saying
MKM Partners analyst Ruben Roy, who has a buy rating and a $72 price target on Micron, said in a research note the memory chip environment still looks favorable
“Our latest supply chain checks indicate positive DRAM [average selling price] trends are expected to continue in the near-term,” Roy said. “We believe that sell-side ASP expectations for NAND in the medium-term remain reasonable.”
Mizuho analyst Vijay Rakesh, who has a buy rating and a $70 price target, recommended buying the recent dips on Micron’s stock.
“We continue to see upside in 2H18 driven by Data Center, Server and PC demand,” Rakesh said. “While NAND should see mid-single digit ASP declines, it should also drive significant demand elasticity.”
Of the 31 analysts who cover Micron, 23 have buy or overweight ratings, seven have hold ratings and one has a sell rating. Analysts have an average price target of $77.47, 29% higher than Wednesday’s trading price.
