Micron gains to provide more clues as to whether the chip explosion is over

The profits of Micron Technology Inc. on Thursday will give a long-awaited indication of a problem that has plagued Wall Street all year around the chip industry: whether customers are accumulating chips during the global shortage.

Last quarter, Micron CEO Sanjay Mehrotra said sales to data center customers had overshadowed those in the mobile market and predicted that data center sales would surpass the broader memory and storage market in the next decade. Revisions to the CEO’s forecast on Thursday will be closely monitored for signs that demand is starting to decline.

Idaho-based chip maker Boise specializes in DRAM and NAND memory chips. DRAM or dynamic random access memory is the type of memory commonly used in computers and servers, while NAND chips are flash memory chips used in smaller devices such as smartphones and USB drives.

Analysts are just beginning to see signs that customers may have overpriced brands last year due to supply shortages, which in turn would have contributed to record sales for the industry. The point is, Wall Street has seen this movie in the past, when the chip industry hit record sales in 2018 only to find out it was because customers were buying double and triple chips to lock prices before they could launch. As a result, chip makers were stuck with huge stocks that took months to get rid of.

For months, analysts have been worried about the chip sector following record stock prices just before 2022, record sales and supply by 2023.

Reading: Pessimism about chip stocks reaches new highs and money seems to be flowing to software

The title of Micron’s earnings pessimism is Morgan Stanley analyst Joseph Moore, who has an equal rating and recently lowered his price target to $ 56 from $ 83.

Moore said he was “increasingly cautious about the outlook for the final market” and that “memory markets remain weak in terms of volume.”

While Moore appreciates improvements in Micron’s cost structure and product roadmap, “China-centric PC and smartphone vulnerability is growing and spreading both geographically and to servers and other markets with declining orders / declining orders to appear recently “.

“There is also a wider shift in spending from goods to services as COVID-related consumer trends shift,” Moore said.

What to expect

Profits: Of the 30 analysts surveyed by FactSet, Micron is expected to post an average earnings of $ 2.45 per share, up from $ 2.21 per share expected at the beginning of the quarter. Micron had forecast third-quarter net income of $ 2.36 to $ 2.56 per share. Estimize, a software platform that uses crowdsourcing from hedge funds executives, stockbrokers, market analysts and others, requires earnings of $ 2.52 per share.

Income: Wall Street expects $ 8.65 billion in revenue from Micron, according to 28 analysts polled by FactSet. That’s higher than the $ 8.1 billion forecast at the beginning of the quarter. Micron forecast revenue of $ 8.5 billion to $ 8.9 billion. Estimize expects revenue of $ 8.73 billion.

Analysts, on average, expect DRAM sales of $ 6.15 billion and NAND sales of $ 2.29 billion, according to FactSet.

Share movement: During the quarter ended May in Micron, the stock fell 17%, while the PHLX Semiconductor SOX index,
-2.20%
has fallen almost 10% over the same period, the S&P 500 SPX index,
-0.07%
has fallen 5.5% and the technologically heavy Nasdaq Composite Index COMP,
-0.03%
has fallen 12%.

Micron has exceeded analysts’ expectations every quarter since December 2018, when sales were about 1% lower than Street Consensus. In the 13 quarters since then, stock movement has been quite unpredictable, rising seven times a day after gains and falling six.

What analysts say

Evercore ISI analyst CJ Muse, who has an outperformance rating and a target of $ 90, said he expects consumer weakness and data center strength to be balanced.

“Bigger picture, we believe that the structural transformation that is currently underway at Micron, along with an increasingly rational backdrop in the memory industry, is positioning the company well to deal with the current slowdown,” Muse said.

“For long-term investors, the current level is very interesting, especially given the important steps Micron has taken in recent years,” Muse said. That said, “given the chance of a recession,” Muse said he sees $ 50 as “the level at which you close your eyes” to the stock.

Another analyst with a falling scenario price of $ 50 per share is BMO Capital analyst Ambrish Srivastava, who has an outperformance rating and a $ 85 price target. Srivastava expects lower capital expenditures at Micron as it expects memory chip prices to be lower than previously expected.

“As large end markets, from computers to devices, which collectively account for a significant portion of the revenue industry, as well as Micron, slow down more than we previously thought, we are lowering our estimates for Micron,” Srivastava said. he said.

Reading: Why semiconductor stocks are “almost non-investors” despite record profits amid a global shortage

UBS analyst Timothy Arcuri, who has a market rating and a price target of $ 115, said he believes “investors continue to overlook several key factors” for the stock.

While the weakness of computers and smartphones is a cause for concern, Arcuri expects high prices to start in 2023 as supply falls again. Also, “demand should be mitigated” by new server platforms that will upgrade processors next year.

“We believe that these specific players in the company have been somewhat lost in the equity investment debate, as consumer demand concerns have prevailed,” Arcuri said.

Of the 36 analysts covering Micron, 32 have market or overweight ratings, three have booking ratings and one has a sell rating, with an average price target of $ 96.74, or 67% higher as of Tuesday’s close, according to the data. of FactSet.

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