Is Micron Stock A Buy Before Earnings? Consider Long-Term Outlook (NASDAQ:MU)
My investment rating for Micron Technology, Inc.’s (NASDAQ:MU) shares is a Buy.
I previously initiated coverage of MU with an article written on July 27, 2021, which focused on the company’s medium-term growth prospects in the next five years. In my latest update, I turn my attention to the preview of Micron’s Q4 FY 2022 (YE August 31) earnings announcement on September 29, 2022.
Micron warrants a Buy rating before earnings based on my analysis.
Its shares have undergone a significant share price correction in 2022 year-to-date, and its current valuations are enticing. The substantial downward revision in consensus numbers for MU suggest that there shouldn’t be major negative surprises when Micron reports quarterly earnings next week. More importantly, the outlook for MU in the long run remains positive; I have a favorable view of Micron’s change in its revenue mix and the increased adoption of forward pricing agreements by its clients in the future.
MU Stock Key Metrics
MU revealed certain key metrics in a 8-K filing issued on August 9, 2022 which sets the expectations for its upcoming fourth-quarter results release.
In the 8-K filing, Micron highlighted that its “FQ4 (2022) revenue may come in at or below the low end of the revenue guidance range.” MU specifically mentioned that its “expectations for CY22 (calendar year 2022) industry bit demand growth for DRAM and NAND have declined” as a result of “macroeconomic factors and supply chain constraints.”
Prior to its August 9, 2022 announcement, MU had earlier guided at the end of June that it should achieve a revenue of between $6.8 billion and $7.6 billion for the fourth quarter of fiscal 2022. In other words, Micron thinks that the company’s Q4 FY 2022 top line could be as low as $6,800 million, which translates into an expected -21% QoQ drop and -18% YoY decline.
On the day that Micron published its 8-K filing regarding forward-looking expectations, the company also participated in KeyBanc’s Capital Market Technology Leadership Forum.
At the KeyBanc’s investor event, Micron added that its clients’ “inventory adjustments” have “broadened” to “most end markets” and “actually weakened more” since the end of June. Previously, only the smartphone and PC end markets showed signs of weakness; but even the industrial, automotive and data center end-markets weren’t doing that well by August.
This explains why MU has become even more pessimistic about its financial performance for the fourth quarter of fiscal 2022, as indicated by key metrics relating to Q4 top line expectations that were disclosed in the August 9, 2022 8-K filing.
Is Micron Expected To Beat Earnings?
I don’t expect Micron to beat the market’s expectations with its Q4 FY 2022 earnings disclosure next week. On the flip side, I am of the view that it is also unlikely that MU’s fourth-quarter will come in way below what investors are anticipating now. In other words, my bet is on Micron delivering in-line Q4 FY 2022 earnings next Thursday, September 29, 2022.
There are two key reasons why I am confident that MU’s bottom line for the fourth quarter of fiscal 2022 will meet Wall Street’s expectations at the very least.
The first reason is that the sell-side’s consensus numbers have already incorporated Micron’s updated guidance revealed in early August.
In the last three months, 24 of the 36 Wall Street analysts covering MU’s shares lowered their Q4 FY 2022 top line projections for Micron, and 23 of them reduced their fourth-quarter earnings per share or EPS forecasts. The sell-side’s consensus Q4 FY 2022 revenue and bottom line estimates for MU were cut by -25% and -45%, respectively. The current consensus top line estimate for Micron is $6,812 million as per S&P Capital IQ, and this is consistent with the company management’s 8-K filing disclosure that MU’s Q4 FY 2022 revenue is expected to be around $6.8 billion or lower.
The second reason is that Micron’s comments at a recent investor event at the beginning of this month appear to have implied that things haven’t gotten worse since August 9, 2022.
At Deutsche Bank’s (DB) 2022 Technology Conference on September 1, 2022, MU emphasized that “there’s no update today”, and it reiterated its updated revenue guidance as per its 8-K filing previously released in early August.
Separately, Micron also noted at the September 2022 DB Conference that “we can control our own capacity” and “investments in technology and drive productivity in the company and do other things that help us sustain the best margin we can.”
It is inevitable that revenue contraction for MU will lead to lower profitability for the company as a result of negative operating leverage. But judging by Micron’s comments at the recent DB conference, the company’s management is cognizant of the need to optimize costs. As such, this points to a lower probability of Micron’s actual profit margins for Q4 FY 2022 coming in significantly below what investors expect.
Is Micron Stock Now Undervalued Or Overvalued?
Micron’s share price has almost halved in 2022 thus far. Year-to-date, MU’s shares dropped by -48.1%, its stock has also underperformed the S&P 500 which is down by -21.7% in the same time frame. The substantial pullback in Micron’s stock price in 2022 means that this is a good time to assess MU’s valuations and determine if the company’s shares are undervalued.
In terms of asset-based valuations, Micron currently trades at a trailing price-to-tangible book value or P/TBV of 1.15 times according to valuation data obtained from S&P Capital IQ. Notably, MU hasn’t traded below tangible book value or a P/TBV multiple of 1 times in the past six years.
With respect to earnings-based valuations, the market values MU at consensus forward fiscal 2023 and 2024 P/E multiples of 10.0 times and 6.5 times, respectively now. Wall Street analysts expect Micron’s EPS to decrease by -41% to $4.95 in FY 2023, before rebounding strongly by +55% to $7.66 for FY 2024.
Separately, the sell-side analyst from Citi (C) covering MU estimates that Micron’s EPS “in a normalized cycle” will be around $7.75, and the stock is trading at an implied P/E multiple of 6.4 times based on this normalized cycle EPS figure. In a nutshell, MU’s forward P/E valuations appear to be undemanding across various bottom line projections.
In conclusion, my opinion is that Micron’s stock is undervalued. My view is supported by a comparison of MU’s current valuations with its outlook in the long run, as detailed in the next section of the current article.
What Is Micron’s Long-Term Outlook?
At the company’s 2022 Investor Day on May 12, 2022, MU outlined its expectations that it will be able to deliver a cross-cycle top line CAGR in the high-single digit percentage range and operating profit margin of approximately 30% for the long term.
I think that Micron’s long-term growth and profitability targets are reasonable and realistic.
In relation to top line expansion, the positive change in MU’s revenue mix by end market should be a key factor.
Micron guided at the 2022 Investor Day that the revenue contribution from the more cyclical PC and smartphone end markets will decrease from 55% in FY 2021 to 38% for FY 2025. By fiscal 2025, MU expects other end markets like automotive, industrial, and data centers which are backed by structural growth drivers to account for the remaining 62% of its top line in aggregate.
With respect to profitability, MU has plans in place to initiate long-term “forward pricing agreements” with more of the company’s clients over time as indicated at its Investor Day in May 2022.
As per management’s comments at the Investor Day, Micron acknowledged that “these forward pricing agreements are very new.” But MU highlighted that its goal is to “continue to work on them with our customers over all the different segments of the market over the next few years” to get more clients to buy into this idea of “forward pricing agreements.” Going forward, this should lead to more stable gross (and operating) profit margins for MU in the future.
Is MU Stock A Buy, Sell, or Hold?
MU stock remains as a Buy for me. A high-single forward P/E multiple for Micron is appealing, when one compares this valuation metric with the company’s long term expectations of high-single digit top line annualized growth rate and an operating margin of 30%. In my view, Micron’s shares should eventually re-rate and command a low-teens cross-cycle and normalized P/E multiple when the market environment turns for the better.