Micron Technology, Inc. (NASDAQ: MU) signaled its FQ3’22 gain card much to the market’s dismay, as the harsh realities of industry stockpiling and weaker demand finally hit home.
We had previously warned of such potential headwinds in our may article that PC and Mobile could cause more problems in Micron’s short-term performance.
Consensus estimates were also revised significantly, given management’s lowered forecasts. As the stock attempted to bottom after its first post-earnings results, we urge investors not to buy this dip. MU remains mired in a bearish bias and its price action signals remain tentative.
Additionally, we maintain the conviction of our valuation model which suggests that investors should continue to be patient in increasing their exposure as MU may underperform at current levels.
As such, we reiterate our Hold rating on MU stocks.
What to expect after winning?
Micron’s third-quarter earnings call was almost entirely focused on its guidance, given the significantly lowered guidance. The company posted revenue of $7.2 billion (+/- $400 million) in the fourth quarter, with an adjusted gross margin of 42.5% (+/- 1.5%). He also expects adjusted EPS of $1.63, which is significantly below the overly bullish Wall Street bullish consensus.
It also highlighted significant weakness in China due to weak spending complicated by COVID lockdowns. Moreover, management’s comment suggests that it seems to have been blindsided by the extent of recent weakness in the industry.
As a result, consensus estimates (still bullish) have been revised significantly, as seen above. Micron’s revised estimates suggest it is on track to post revenue growth of 13.3% in FY22, down from a previous forecast of 21.3%. Notably, Micron’s weaker end-market impact is expected to persist through FY24. 24, down from its previous estimate of $43.62 billion.
As a result, changes to its revised adjusted gross margin guidance also had a marked impact on consensus estimates through FY24. Given its inherent operating leverage/deleveraging, free cash flow margins ( FCF) from Micron were also revised downwards.
Nonetheless, Micron’s business model should still be much healthier relative to its profitability over the past five to ten years. Notably, MU posted an average FCF margin of 13.6% (5-year average) and 8.4% (10-year average), respectively.
However, its pessimistic outlook could continue to weigh on its short-term performance. Bloomberg recently reported that Korea’s chip inventory has grown at a record pace since March 2018.
Additionally, DIGTIMES also reported that Samsung (OTCPK:SSNLF) may cut the price of its chips in H2’22 to “further expand its market share”. He also pointed out that “stocks of server memory chips have also ballooned.”
Micron’s earnings comment also did not rule out a potential reduction in data center demand. We believe management has also shrewdly downplayed the benefits of its longer-term agreements (LTAs) on lifting its current unease in response to an analyst’s concerns. Articulated management (edited):
So I understand your concern that, okay, if they’re not buying based on LTA volume, what are those LTAs for. And we’ve said many times that these long-term agreements are never meant to be take-it-or-pay-agreements. That was not the purpose for which they were created. And there are no prices in these agreements either. Rather, it is a volume-based agreement, and the price is negotiated quarterly or monthly, depending on the type of customer agreements. (Call on Micron FQ3’22 results)
MU – Price action indicates caution is warranted
MU continues to be entrenched in a bearish bias, as its initial post-earnings selloff broke above its previous June lows.
Currently, MU is trying to rally and form a short-term bottom, going against the prevailing bearish momentum. We believe the opportunity to reduce exposure to MU is not attractive due to oversold technical stocks. Therefore, investors should wait for another subsequent upside trap (significant rejection of buying momentum) to form before overlapping.
On the other hand, investors considering increasing their exposure are advised to remain patient, as there is no downside trap yet (significant rejection of selling momentum).
Is MU stock a buy, sell or hold?
We reiterate our Hold rating on MU stock.
We shared our valuation model previously which highlighted that even an entry close to its intermediate support ($42.25) could underperform. With the consensus estimates significantly revised, we urge investors to consider a level below $40, coupled with constructive price action, before adding exposure.
Our price action analysis highlights that MU may be forming a near-term bottom after hitting its recent lows in June. However, the absence of a bear trap does not bode well given its dominant bearish momentum.