Micron Technology (NASDAQ:MU) surprised on estimates for the fiscal first quarter 2020, crediting growing demand for memory chips. Shares had a rather turbulent 2018 as the trade war with China created a roadblock to chipmakers, and a glut of inventory caused headaches. 2019 has involved a recovery in shares, but Mircon's profits have still taken hits.
While overall revenue was still down in the fiscal first quarter, the company seems rather optimistic about rising demand that 5G devices and new game consoles, like the recently announced Xbox, will create for chipmakers. The company still has a ways to go, but the stock is cheap enough that it might be worth looking at.
Analysts had been looking for improvements to inventories prior to the earnings release, and the confirmation of some more positive news sent the stock up 3% on the day following its earnings release.
The fiscal first quarter
The quarter itself wasn't that strong. Yet despite big declines year over year, the company managed to not fall short of analyst estimates.
- Revenue was down 35% year over year to $5.14 billion. Total revenue gained on a sequential basis, however.
- Operating income dropped 86.2% year over year to $518 million. Operating margin was 10.1% of revenue, compared to 47.5% in the fiscal first quarter of 2019.
- Earnings per diluted share were $0.43 compared to $2.81 a year ago. Adjusted earnings of $0.48 per share beat estimates of $0.47.
The balance sheet seems very healthy. Carrying nearly $7 billion in cash, Micron absolutely has the resources to weather the tougher period and to grow into new opportunities. With total equity at $36.5 billion, there are true assets behind the stock, making investment appealing. Many names in the technology businesses carry market capitalizations far beyond their balance sheet values. Micron's capitalization of $58.78 billion is not that bad compared to total equity.
Aside from faring well against estimates, the quarter really wasn't that great. It's the optimistic narrative that Micron created for investors indicating that the fiscal second quarter could be the company's bottom in terms of tough conditions and performance. CEO Sanjay Mehrotra praised the progress that Micron has made: "Our significantly improved competitive position, dramatically stronger product portfolio, structurally higher profitability and investment-grade balance sheet position Micron very well to drive long-term shareholder value." Fiscal Q2 guidance is calling for revenue of $4.5 billion to $4.8 billion under generally accepted accounting principles (GAAP). Gross margins are expected to be around 26%, with earnings of around $0.25 per diluted share.
If fiscal Q2 does indeed turn out to be the bottom on which Micron begins its next bullish cycle, the current valuations seem to offer a nice opportunity. Micron finished fiscal 2019 with diluted earnings of $5.51 per share. That gives the stock a trailing P/E ratio of 10. If 5G and new gaming systems do drive demand for chips, and inventory gluts diminish, the stock could be set for upside through the year.
A decrease in the oversupply would help to put some higher pricing pressure on products, and help Micron's ability to derive higher overall revenue again. That's the appeal of Micron. It's about the cheap valuation now, relative to the potential of what the company could do if demand picks back up.