Sometimes, low expectations are the best expectations.
Micron’s (MU) stock soared Wednesday as much as 14% after the company reported stronger-than-expected earnings. This is welcomed news for Micron, as before the earnings release, shares were down 25% since early May. But this doesn’t mean Micron is out of the woods just yet: The only reason the stock is up is because the company beat low Wall Street expectations, not because the company has turned itself around. Revenue and EPS both plummeted since last year (38.6% and 66.7%, respectively), but Wall Street sees the earnings beat as an encouraging sign.
Analyst Sidney Ho of Deutsche Bank is in the bulls camp, as he maintains his Buy rating and $45 price target, which implies nearly 16% upside from current levels. (To watch Ho’s track record, click here)
Micron reported revenue at $4.79 billion (2% higher than consensus) and EPS at $1.05 (more than four-times estimates). But the company still faces pressure from pricing — DRAM and NAND sales declined double digits, with pricing being the main reason why.
Nevertheless, Ho calls the report “strong.” The analyst says, Micron “is starting to see signs of a demand recovery in both DRAM and NAND, and customer inventory levels appear to be improving.” Internally, the analyst is encouraged by Micron’s disciplined capex and utilization strategy, with FY20 capex expected to be down meaningfully.
Ho is encouraged by the stronger financials and indicators for the future. He says Micron is “seeing early signs of a DRAM demand recovery and expects robust bit demand growth in 2H vs 1H CY19,” while cloud customers are “turning the corner on inventory levels and beginning to approach normal DRAM inventory levels.” On NAND, he says the “commentary appears to have turned more positive, as the company expects the market to stabilize in 2H CY19.
While the news was good this quarter, Ho does not believe it marks the trough. He believes the bottom will come either the August or November quarter, but he remains “confident that we are close and come away from the earnings call incrementally more positive on the memory market as signs of a recovery start to show.”
Micron has battled external challenges since the middle of 2018 when the chips market burst. Making matters worse is the ongoing trade battle between US and China. Micron relies heavily on China for sales, with more than 50% of revenue coming from the country, but most of the analyst community does not see either as a long-term problem.
When looking at Wall Street’s stance, Ho is not the only bull, as TipRanks analytics showcase Micron stock as a Buy. Out of 22 analysts polled in the last 3 months, 13 rate Buy on MU, 5 maintain Hold, while 4 issue Sell. The 12-month average price target stands at $42.90 marking about 16% upside from where the stock is currently trading.
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