Tech Is The Big Winner, No Doubt About It
If one sector has emerged as a winner from the global coronavirus pandemic it is the tech sector. As millions of workers worldwide social-distance and turn to work-from-home options the demand for technology has boomed. Verizon (VZ) reported just the other day double-digit increases in demand across all segments, sign indeed that connectivity and technology are helping us all through the crisis.
But tech’s success, especially all things related to the Internet, goes deeper than that. The Internet as we know it has its roots in the government's need to withstand communication disruption. Projects to connect military assets evolved into Arpanet. That system relied on redundancy and connectivity rather than direct lines of communications so if one route is impeded another can take its place. A system that is not only working for us today, during the pandemic but thriving.
Secular trends were already shifting toward remote-workstations and work-from-home solutions, the pandemic shift to social-distancing has only accelerated those trends. When the viral threat passes increased demand for technology will remain.
When Bad News Is Good News
Micron (MU) reported earnings this morning and it was truly a mixed bag of results. The company was expected to see revenue fall more than 18% for the quarter, not good news, but beat that expectation if only by a small margin. The mitigating factors, the reason the stock jumped 5% in premarket trading, are twofold. The first is the quarter ended February 27th, plenty of time to show the impact from China’s viral-shutdown, so it's taking away a certain amount of uncertainty. The second is the outlook for 2020 revenue is getting better.
“Micron delivered solid second-quarter results and revenue at the high end of the guidance range, despite the unfolding COVID-19 pandemic,” said Micron Technology President and CEO Sanjay Mehrotra. “I am grateful to our team for the excellent business execution we have achieved during this unprecedented situation. Their resilience, together with Micron’s technology leadership, stronger product portfolio, and healthy balance sheet, give us confidence that we will emerge from this challenging time well-positioned to capture the robust long-term demand opportunities for memory and storage.”
While revenue for DRAM, about ⅔ of the total, fell sharply they were offset by an increase in DRAM deliveries and revenue for NAND. Deliveries of DRAM rose nearly enough to offset the decline in orders suggesting post-crisis demand could be robust. DRAM is important because it is the main memory on most computers and other applications where high-memory and low-cost are key. On the NAND side, the most commonly used type of flash-memory, revenue increased by nearly 10% while shipments surged 20%.
Micron Guides Higher, In-Line With Consensus
Micron’s calendar 1st quarter results were good enough to raise guidance. The company expects revenue in a range around consensus which, for now, is good enough. With consensus at $4.9 billion analysts are expecting revenue to growth YOY by 2.2% and accelerate in the following years.
Looking to calendar 2021 the forecast is robust with revenue up 25% and earnings more than 100%. For those looking for longer-term growth, the industry outlook for DRAM and NAND demand growth is in the high teens and low-30% range respectively. Micron is well-positioned to benefit from that growth.
A Cheap Stock With Bullish Outlook
Trading at only 14X forward earnings with double-digit earnings growth and the support of secular trends Micron is very cheap. Today’s news has shares up 4% and the charts looks like more gains could come. The indicators confirm a shift in momentum and buy signal that could lead the stock higher for several weeks. Longer-term, I think this stock will be retesting its 2020 highs by the end of the year or early 2021
Although the outlook is bullish, there is some risk and most of it technical in nature. For starters, the stock has several areas of technical resistance to get through before investors can breathe a sigh of relief. The closest is at $46, $48 and $50 and may keep prices contained or even spark another round of selling, but that is a near-term view.. Because the stock is still trading below the short-term moving average and already showing signs of resistance a move to retest support is also a possibility in the near-term so investors should be cautious.