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Micron Estimates Higher After Pre-Announcement — Stock May Still Be a Buy

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Needham and Co. analysts raised their estimates on Micron  (MU)  after company pre-announced strong results for the current quarter. The stock, riding a few secular growth waves, is now valued richly. 

The shares did fall about 3% to $47.80 Thursday, after having run up 12% in the day surrounding management’s announcement. Along with most semiconductor stocks, especially those that supply 5G devices, Micron has been a high beta name. It fell 43% from its 2020 high to low, worse than the S&P 500’s 34% drop, and it has rebounded 38%, better than the S&P 500’s 36% bounce. 

Micron told analysts at a conference Wednesday that it is expecting quarterly revenue to be come in at roughly $5.3 billion, above the prior guidance of $5 billion. The company is now looking for earnings per share of roughly 78 cents, up from a prior forecast of 55 cents. CEO Sanjay Mehrotra said the stay-at-home trend, accelerated as a result of the Coronavirus lockdowns, is providing a tailwind to Micron’s data center business, which is tied to cloud spend. Mehrotra also said memory chip pricing is also tracking well, which could be related to 5G devices and supports gross margins. 

He added that the company is looking for roughly 187 million 5G unit chip sales for all of 2020 at the midpoint, not far below the pre-COVID estimate of just over 200 million. Analysts expect 5G sales to be strong in the back half of the year. They also still expect 5G to be a multi-year growth cycle, a sentiment echoed by Micron at the conference. Qualcomm  (QCOM)  also recently said it is looking for roughly 200 million 5G unit sales this year. 

"We expect MU to continue to benefit from strength in data center and a significant 5G-related handset refresh cycle in 2H20/'21, coupled with the ongoing recovery in NAND and DRAM prices, which we expect to continue throughout 2020,” wrote Needham analyst Rajvindra Gill in a note. 

Gill raised his 2020 revenue and EPS estimate to $20.64 billion from $19.74 billion and $2.49 (adjusted) from $1.94, reflecting margin expansion not only from higher gross margins but also operating leverage. 

But Micron isn’t trading on 2020 earnings. Investors expect a vicious 2021 rebound from what will be a 2020 campaign of sales and earnings declines — and they’ve been willing to snatch up shares of Micron in advance of that. Gill left his 2021 revenue and earnings estimates unchanged, but he is expecting a 60% EPS growth rate in 2021, which also pales in comparison to the consensus estimate for 111% growth. 

Micron now trades at almost 14 times consensus EPS projections for the next year, against its 5-year average of 10 times. There’s a lot going on in that multiple. First off, some of Micron’s memory chips supply data centers, which is a growth area. Revenue from the sector comprises roughly 16% of Micron’s total revenue, according to FactSet data. So Micron’s business is mostly comprised of electronics sales. Secondly, the lengthy expected 5G cycle supports revenue growth in the mid-teens in percentage terms. Thirdly, Micron’s multiple is reflecting that semiconductors are in favor with investors, as it’s a leading sector in the expected 2021 rebound from the health crisis. 

Without having full clarity on where the multiple should land, one may assume it’s somewhere near a reasonable level. Memory chip maker Western Digital  (WDC) , less exposed to secular trends, trades at less than 10 times earnings. Qualcomm, expected by many to take market share in 5G, trades at 15 times. 

Assuming Micron shares can sustain a 14 times multiple throughout the year, and assuming 2021 EPS estimates of $4.81 remain largely in place, the stock could return 40% from here. Importantly, the stock is trading at just under 10 times 2021 earnings, so if that’s a true multiple on normalized earnings, it brings the attractiveness of the stock down considerably.

But the average analyst price target, according to FactSet, represents 25% upside as it includes a growth-like 17 times multiple, while Gill’s price target of $63 represents 31%. He uses 19 times multiple on forward one year’s earnings. So even using a conservative multiple, the stock could be highly attractive. 

Two considerable risks for Micron and the rest of the semi stocks: a second wave of virus infections and a worse-than-expected 5G cycle, which is a discernible fear found in the language of some chip analysts. 

 Earnings are June 23. 

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