Micron Technology (MU -3.78%) has been battered badly on the stock market in 2022, with share prices of the chipmaker down 37% so far despite a string of impressive quarterly results and its terrific growth.
Investors, however, will be hoping for a turnaround in the memory specialist's fortunes when it releases its fiscal 2022 third-quarter earnings report on Thursday, June 30. But will Micron be able to deliver better-than-expected results? More importantly, will Micron's guidance be solid enough to trigger a rally in the stock? Or should investors sell Micron stock before its earnings report to avoid any further losses? Let's find out.
Reasons to buy Micron Technology stock before earnings
There are two reasons buying Micron stock looks like a good idea before its earnings are out.
First, Micron stock is dirt cheap right now. It is trading at just seven times trailing earnings and 4.8 times forward earnings. These multiples are well below the S&P 500's earnings multiple of 20. So, a solid set of results from Micron could send the stock soaring and it may not be available at such a cheap multiple following its earnings report.
Second, it is worth noting that Micron has beaten Wall Street's earnings expectations comfortably in each of the last four quarters. The healthy demand for Micron's memory chips helped the company deliver robust guidance in March that turned out to be better than what analysts were looking for. That could happen again.
Micron is expecting $8.7 billion in revenue and $2.46 per share in adjusted earnings for fiscal Q3 (which ended on June 3), which is in line with consensus estimates. These numbers would translate into year-over-year growth of 17% in revenue and 31% in earnings per share. However, it won't be surprising to see Micron posting better numbers, thanks to the solid demand for memory chips in multiple end markets such as data centers, smartphones, automotive, graphics cards, and personal computers (PCs).
Micron CEO Sanjay Mehrotra laid out the company's growth drivers on the March earnings conference call, saying, "We anticipate underlying demand in calendar 2022 to be led by data center, ongoing adoption of 5G smartphones, and continued strength in automotive and industrial markets."
Micron's cheap valuation and its ability to sustain its healthy growth are two reasons why investors may want to buy the stock before its earnings are out. But a closer look at the developments in the memory market indicates that Micron may run into a few headwinds in the short run.
Reasons to sell
Micron's fortunes are dependent on the price of memory chips, and this is where things could go south for the company when it releases its results.
According to market research firm TrendForce, the price of dynamic random access memory (DRAM) chips reportedly fell in the second quarter. More specifically, TrendForce estimates that DRAM prices are down between 0% and 5% in the second quarter of the calendar year on account of weak demand for consumer electronics such as PCs and smartphones and surging inflation.
The buildup of inventory due to the softness in demand is expected to spill over into the third quarter and cause a greater drop in memory prices. As it turns out, DRAM prices could drop between 3% and 8% in the third quarter of 2022. This seems like bad news for Micron as DRAM chips produced 73% of the company's revenue in fiscal second quarter.
History indicates weak memory pricing hurts Micron significantly. So, if the reports about weak memory pricing are indeed true, Micron's quarterly results and guidance may not be up to the mark. Analysts are already anticipating a slowdown in Micron's growth this quarter. They expect the company to guide for $9.45 billion in revenue and $2.78 per share in earnings, which would translate into 14% year-over-year growth in its top and bottom lines.
While those growth rates are respectable considering Micron's cheap valuation, they are a step down from what the company is expected to deliver in the fiscal third quarter. It is also worth noting that Micron's revenue jumped 25% in the fiscal second quarter, while adjusted earnings more than doubled year over year.
Any signs of a slowdown in Micron's growth won't be received well by investors, and that could send the stock lower following its terrible stock performance so far this year. As such, investors may witness more turbulence for Micron Technology stock in the near term, which is why they could consider selling this tech stock before the company releases its earnings.
