From the beginning of 2016 to mid-2018, Micron (MU) shares couldn’t stop climbing. After jumping from about $10 to over $60, the semiconductor giant has finally started to drift down a bit, slumping to $45. With Micron’s FQ4 earnings and margins far surpassing consensus predictions, some investors have reinstated their faith in the stock; however, some on the Street forecast a bleak future for MU.
Top-rated blogger Stone Fox Capital (ranked #18 out of 6,617 bloggers on TipRanks) expresses looming caution over the tech powerhouse. The cyclical nature of DRAM and NAND flash memory demand, combined with lower than expected guidance and declining prices in memory software, have made Micron a bad investment for the blogger at this point. According to Stone Fox, “the key remains what Micron does with its precious cash resources, [especially] if the stock is exceptionally cheap. And so far, the company isn’t doing enough.”
Part of why Stone Fox Capital is wary on Micron is the negative outlook for upcoming quarters. Since F3Q17, when the company reached 37.5% revenue growth, guidance began following up with negative revenue estimates for ensuing quarters, which started at -$500M for F4Q17. As FY18 has progressed, consensus estimates have repeatedly outweighed those of guidance, and SFC’s suspicion on the stock has persisted. In the next quarter alone, the guidance reflects revenue growth declining 16%.
Perhaps this pessimism is linked to another aspect of Micron’s downside: its extremely volatile sector. The cyclical nature in the chip industry already had analysts expecting Micron’s revenue growth to decline by about FY20-21, but after an inconsistent last few quarters, analysts are expecting this decline to come as soon as fiscal Q4 and last for years to come. As explained by Goldman Sachs analyst Mark Delaney, “Memory downturns usually last for several quarters and can see an acceleration in price declines, as customers delay procurement to wait for lower prices when possible, causing a snowballing effect that can lead to downturns to be worse than initially anticipated by investors.”
On top of negative guidance and a potential trough, Micron’s $10 billion stock buyback program, which it announced in Q2, appears it may not unfold as initially planned. Because memory technology is becoming cheaper and more commoditized than ever, Micron’s original FY21 EPS estimate of $13.75 (currently at $11) is beginning to look like it may have been a big stretch. Stone Fox maintains that in addition to DRAM hinting at only a decline in price, “[it] accounts for the bulk of revenues and profits at Micron.” With a substantial revenue guide down, SFC sees “no logical reason” for the company to now invest in its aggressive buyback program.
Most of the Street is far more confident than Stone Fox’s sidelined stance, with TipRanks analytics showcasing MU as a Strong Buy. Based on 24 analysts polled in the last 3 months, 19 rate a Buy on Micron stock while 5 maintain a Hold. The 12-month average price target stands at $69.92, marking a nearly 51% upside from where the stock is currently trading. (See MU’s price targets and analyst ratings on TipRanks)