Buy Micron (MU) Stock at New Highs Ahead of Earnings On 2020 Chip Growth?

Should investors consider buying Micron (MU) stock at its new highs ahead of Wednesday's Q1 earnings release, on 2020 chip industry expansion? Read More...

Micron MU shares jumped over 4% Monday to touch a new 52-week intraday high. The positivity came after MU earned a bullish price target ahead of the DRAM and NAND memory chip powerhouse’s Q1 fiscal 2020 earnings release, which is due out after the closing bell on Wednesday, December 18.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="What’s Going On?” data-reactid=”12″>What’s Going On?

Micron is one of the largest makers of DRAM and NAND memory chips in the world. Investors should note that DRAM is used in servers, PCs, and more, while NAND chips are used in smartphones and solid-state drives. The Boise, Idaho-headquartered firm has been hit over the last year by the ebbs and flows that are inherent in cyclical semiconductor space.

NAND and DRAM pricing has hurt Micron recently, with its revenue and earnings down in the trailing three periods. Other firms such as Nvidia NVDA and Applied Materials AMAT have seen a similar downturn, as has much of the broader chip industry.

In fact, the semiconductor industry has seen its earnings slip in the trailing three quarters and they are expected to fall again in the fourth quarter and in Q1 fiscal 2020, based on our Zacks estimates.

Despite the overall downturn, chip stocks have surged in 2019, as investors took advantage of beat-down valuations that came after the late-2018 selloff. Plus, the semiconductor market is projected to remain a driving force behind the entire technology space from Apple AAPL to Amazon AMZN for decades to come.

More recently, chip companies have provided upbeat guidance, which includes the largest U.S. chip maker by revenue, Intel INTC.

In Micron-related news, Susquehanna Financial Group analyst Mehdi Hosseini on Monday raised his MU price target from $45 to $85 per share. Hosseini raised his price Micron price target because the analyst calls for a recovery in the supply-and-demand balance for memory chips in 2020 and 2021.

On top of that, the Dow, S&P 500, and Nasdaq all surged to new intraday highs Monday. This came after U.S. and Chinese officials announced last Friday that they reached a so-called phase one trade agreement.

Plus, U.S. unemployment rests at 50-year lows and corporate earnings growth is projected to return in 2020. All of these conditions set the table for what could be another strong run in 2020.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Other Fundamentals ” data-reactid=”49″>Other Fundamentals

Investors can see in the first chart above how quickly Micron’s revenues spiked over the past five years or so. For example, Micron’s fiscal 2014 sales soared 80% from $9.1 billion to $16.4 billion. The firm then saw a small decline for two years, before its 2017 revenue surged 64% and its 2018 sales jumped another 50% to reach over $30 billion.

The company’s sales movement correlates somewhat with the rise and fall of its stock price. For example, Micron stock soared from under $11 a share in January 2016 to $58 in May 2018. MU stock then fell until the market bounced back after Christmas last year, with Micron shares up 67% in 2019 to outpace the S&P 500’s 25% jump and its industry’s 40% average climb.

More recently, Micron stock has popped over 11% in the last month and it touched a new 52-week high of $54.30 per share Monday on far larger than average trading volume.

MU’s valuation picture has become a bit stretched given its recent climb. The stock is currently trading at 2.7X forward 12-month Zacks sales estimates, which rests well above its three-year median of 1.8X and just below its recent highs of 2.9X. With that said, Micron is still trading at a discount compared to its industry’s 3.6X average, as it has for all of the last five years.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Q1 Fiscal 2020 Outlook & Beyond” data-reactid=”65″>Q1 Fiscal 2020 Outlook & Beyond

Last quarter, Micron saw its Q4 fiscal 2019 sales tumble over 42%. This came after its third quarter revenue fell 39% and Q2 dropped 21%. With this in mind, our Zacks estimates call for MU’s first quarter fiscal 2020 revenues to fall roughly 37%. This downturn is projected to continue next quarter, to the tune of a 17% drop.

Micron’s full-year fiscal 2020 revenue is then expected to fall over 13% from $23.41 billion to $20.29 billion—which looks even worse compared to 2018’s $30.39 billion. MU’s fiscal 2021 sales are projected to climb 18% over our current-year estimate to come in slightly above 2019’s figure.

On the bottom-end of the income statement, Micron’s adjusted Q1 earnings are then projected to fall 83.5% from $2.97 per share in the prior-year period to $0.49 per share. This would roughly match last quarter’s decline.

Overall, MU’s fiscal 2020 EPS figure is projected to sink nearly 63% from $6.35 to $2.36 per share—2018’s figure came in at $11.95. Like with its top line, Micron’s adjusted fiscal 2021 earnings are projected to climb roughly 93% above our current-year estimate.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Bottom Line” data-reactid=”81″>Bottom Line

Micron is currently a Zacks Rank #4 (Sell), based mostly on its recent downward earnings estimate revision activity. On top of that, MU rests in the bottom 4% of our over 250 Zacks industries heading into its upcoming earnings report.

Clearly, Micron’s top and bottom lines are projected to continue to plummet this year. Therefore, with the stock at new highs on the back of the longer-term growth outlook for the entire semiconductor market, investors might want to see how Wall Street reacts to MU’s actual results and guidance as a post-earnings pullback could be in the cards.

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