Shares of semiconductor stock Micron (NASDAQ: MU)
have been trading down quite aggressively since the end of last year. Despite a bit of a bounce this week (more on that later) they’ve still fallen as much as 45% from the all-time highs they printed back in November. But with the halfway point of the year now firmly behind us, it’s a good time for many investors to revisit their portfolio to see how well it's positioned for the second half of the year. In particular, now’s a good time to see if there are perhaps overlooked stocks that are worth consideration.
We think that Micron, with its huge addressable market and cemented product leader position, could be one such stock. Let’s take a look at some of the reasons why.
Towards the end of last week, the Idaho-headquartered company released their fiscal Q3 earnings and forward guidance. Their earnings per share topped analyst expectations while revenue was in-line and up more than 16% year on year. The stock initially dipped the next trading day, most likely as a reaction to the softer than expected guidance from management. Micron’s team said they anticipate fourth-quarter revenue to be between $6.8 billion and $7.6 billion, with adjusted earnings per share between $1.43 and $1.83 per share. But analysts had been expecting Micron to generate $9.05 billion in revenue and generate adjusted earnings of $2.62 per share.
This miss was enough to initially send shares down 6% but in the week since then they’ve managed to rally as much as 15% off that initial dip. Could it be that in the context of continuing supply chain and inventory issues, investors weren’t all that surprised by the soft guidance? President and CEO Sanjay Mehrotra had said with the release that “recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth in fiscal 2023. We are confident about the long-term secular demand for memory and storage and are well positioned to deliver strong cross-cycle financial performance.”
The team over at Barclays had in fact highlighted the risk of soft guidance in the days preceding last week’s report. Analyst Tom O’Malley, who reiterated his Overweight rating on Micron shares in the same note, lowered his price target to $75 from $105, on the basis that consumer markets are weakening. He feels this has played a significant role in the weakness of DRAM and NAND revenues. He noted that NAND spot pricing has fallen 8% over the past quarter, with DRAM’s down 12%.
But this fresh price target still suggests there’s upside of almost 30% to be had from where shares were trading early on Thursday morning. The cautiously bullish stance was echoed by O’Malley’s peers at UBS as well. Tim Arcuri and his team there maintained their Buy rating while trimming their price target from $100 to $90. Arcuri is of the opinion that much of the worst case scenario is already priced into shares after their 45% drop this year. Indeed, he felt that the only way the company could see even more downside after the "substantial inventory/demand correction" it is seeing is if the server DRAM business were to "significantly weaken," which is unlikely to happen for several reasons. These include rising server component growth, the need for more memory and a server fresh that creates a so-called "demand cushion."
BMO Capital Markets analyst Ambrish Srivastava, who also reiterated this Outperform rating on Micron shares, noted that investors should start buying the stock when fundamentals weaken and estimates are cut "sharply." In a note to clients he wrote "and while there is likely one more shoe to drop, i.e., weakening datacenter demand, this is quite close to a capitulation".
The reaction of the stock to last week’s report certainly seems to bolster this opinion. Shares are now higher than where they were before
the softer than expected guidance was issued, which implies that Wall Street thinks the worst is now behind Micron, and it’s fair to expect an uptrend to begin from here.
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