NEW YORK (TheStreet) -- Chipmaker MicronTechnology (MU) - Get Report crushed the consensus estimates when it reported its third-quarter results after the bell on Monday. For shareholders, now may be an ideal time to ring the register and take some profits.
I'll quickly cover the results and then explain why the potential reward is overshadowed with peril, but you can mitigate the risk if you choose to continue holding the stock.
Micron Technology reported adjusted earnings of 79 cents a share, easily exceeding the average analyst estimate of 72 cents. Revenue was $3.98 billion, better than the average estimate of $3.89 billion.
Sequentially, earnings fell from 85 cents per share, while revenue dropped from $4.1 billion. On a diluted earnings per share basis, the company earned 68 cents, 7 cents greater than last quarter.
The purchase of Elpida renders year-over-year comparisons challenging at best. From a forward earnings-per-share perspective, Micron Technology is more expensive than a year ago, but it is appropriately priced considering the company's DRAM earnings concentration, and vendor reliance.
The Elpida purchase also makes Apple (AAPL) - Get Report the largest customer. About 11% of total net sales is from the iPhone maker. Apple is widely expected to release the iPhone 6 this fall in time for the holiday shopping season. However, Amazon's (AMZN) - Get Report new Fire phone is expected to hit AT&T's T shelves in late July.
I don't have a huge amount of confidence in Amazon's ability to capture market share, but obviously Amazon's CEO Jeff Bezos doesn't share my opinion. Considering Bezo's market prowess, the Amazon Fire phone can't be dismissed out of hand. Samsung, a Micron Technology competitor, makes the memory chips for Amazon's Kindle Fire, and is a likely vendor for the Fire phone.
Samsung's Galaxy S6 release is expected at the same time as Apple's iPhone 6 release. Samsung has proven it can influence iPhone sales and depending on its reception, may cause softness in iPhone sales. Microsoft (MSFT) - Get Report with Nokia (NOK) - Get Report are factors because of their recent market share growth, but unlikely to move the needle far within the next year.
As is the case with most computer components, memory chip size and speeds continuously fall in price. DRAM memory since 2008 has trended lower by about 25% per year. In order for Micron to grow revenue and earnings, it must stay ahead in the race to the bottom.
Just as vital as understanding Micron's challenges is understanding what other market participants are thinking. Micron is executing well, but the bull thesis isn't new. The shares increased 132% since a year ago. It's easy to gain the feeling that smart money may begin taking money off the table, at least in the short run.
If you're a long-term investor who wants to maintain your position and take some gains, I suggest writing some covered calls. You will capture time premium and will hedge against a pullback. Otherwise, you may wish to consider taking some money off the table, and using the funds to buy on a dip lower.
Micron's best days are ahead of it, but you need to understand what other market participants are thinking as well if you want to stay ahead of the game. If you're looking to buy shares, consider waiting for a pullback, or even better, short an appropriate number of put options that you want to get exercised. You won't miss a dividend, and you'll have a better entry price, or a profit while lowering your risk.
At the time of publication, Weinstein had no positions in securities mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates MICRON TECHNOLOGY INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate MICRON TECHNOLOGY INC (MU) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and notable return on equity. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- MU's very impressive revenue growth greatly exceeded the industry average of 3.1%. Since the same quarter one year prior, revenues leaped by 97.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Powered by its strong earnings growth of 317.85% and other important driving factors, this stock has surged by 127.70% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, MU should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- MICRON TECHNOLOGY INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, MICRON TECHNOLOGY INC turned its bottom line around by earning $1.00 versus -$1.04 in the prior year. This year, the market expects an improvement in earnings ($3.10 versus $1.00).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Semiconductors & Semiconductor Equipment industry. The net income increased by 355.6% when compared to the same quarter one year prior, rising from -$286.00 million to $731.00 million.
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Semiconductors & Semiconductor Equipment industry and the overall market, MICRON TECHNOLOGY INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: MU Ratings Report