Why This Stock Should Continue Its Blazing Run Post Earnings

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Chip maker Micron Technology (NASDAQ: MU) has been on fire this year as shares have more than doubled. The stock’s resurgence this year has been helped by improving fundamentals of the DRAM (dynamic random access memory) and NAND markets while a terrific earnings report earlier this year in March ensured that the rally didn’t lose steam.

As such, the upcoming third-quarter earnings report next week and the accompanying outlook will be of great importance if Micron is to continue its blazing run. Let’s see what’s expected of Micron and if it can upstage analyst expectations.

On revenue

Analysts, according to Yahoo! Finance, expect Micron to post revenue of $2.22 billion, up 2.4% from last year. Improving pricing trends along with controlled supply and improving demand should continue to support prices of DRAM and NAND, and as such, help Micron at least meet consensus estimates. But then, the cues from other players in the industry have been positive and it won’t be surprising if Micron beats the revenue estimate.

For instance, according to DRAMExchange, DRAM pricing continued to trend higher in April, while DRAM maker Inotera witnessed a 20% revenue jump in revenue in May and the company expects to post a profit in the second quarter after thirteen consecutive quarterly losses, according to Digitimes.

Micron, along with others in the industry, has been keeping supply on a leash and as such, providing support to prices, and this should impact revenue positively. Also, burgeoning demand for mobile devices should continue to support the company’s NAND and mobile DRAM businesses. Like DRAM, even NAND prices have risen this year as demand is probably exceeding supply if we are to take a look at a few industry trends (more on this later).

Thus, given the underlying fundamentals of NAND and DRAM pricing, I won’t be surprised if Micron beats revenue estimates.

On earnings

Analysts are expecting Micron to post a profit this time, with the bottom line estimate pegged at $0.01, a far cry from last year’s loss of $0.32 a share. Analysts seem to be quite bullish on Micron’s bottom line performance this time, and the company might even satisfy estimates.

Micron had missed on the bottom line last time, posting a loss, but it would have beaten estimates had it not been for a $120 million loss due to currency hedges, as reported by RBC Capital Markets.

Micron has a tainted history on the bottom line, missing estimates by wide margins in the last four quarters, but this time, we might see a reversal of fortunes. Strong pricing coupled with solid demand and constrained inventory had pushed up the company’s gross margin to 18% in the second quarter, up from 12% in the one before it.

Lower manufacturing costs had also played a part in this solid improvement, and as the trends in the industry are still the same as last time and improving further, there is a good chance that Micron would post a profit.

On outlook

Micron doesn’t provide an outlook per se, but a lot depends on management’s commentary, which was positive last time and there is a high chance the status quo will be maintained. Firstly, the strength in pricing of its products should continue to inspire confidence, as Micron itself had forecasted improvements throughout this year and the next due to limited supply.

And then, the proposed takeover of Elpida Memory, which has been inching closer to completion, should provide it more pricing power and a choice account in the form of Apple (NASDAQ: AAPL). Elpida was one of the suppliers to Apple a couple of years back and Micron itself had mentioned over the previous earnings call that it counts top two smartphone makers as its clients.

Now, if the company has indeed been chosen as a supplier for the upcoming iPhone, then we should see better revenue going forward. Apple had diversified its supply lines for the iPhone 5 and Elpida was one of the winners, with Apple probably using different suppliers.

As Apple looks to reduce its reliance on Samsung for components and Elpida having already supplied DRAM to the iPhone maker, Micron’s chances of benefiting from the booming mobile DRAM market look very bright.

And then, as I’d mentioned earlier, rising demand for NAND memory along with low supply should continue to support prices. As flash memory maker SanDisk’s (NASDAQ: SNDK) CEO, Sanjay Mehrotra, had pointed out last month, chipmakers haven’t been bumping up their capacities even though demand has been increasing. SanDisk itself will be keeping its capacity additions below the industry average and as such, it sees stable NAND pricing.

Moreover, SanDisk had upped its revenue forecast when it last reported earnings, suggesting that the company is well-placed to benefit from the dynamics of the NAND market.

Thus, Micron’s management should once again roll out a string of positives on the upcoming conference call as we enter the second half of the year where its products should typically be more in demand considering the ramp up in the production of new devices.

The stage is set for Micron to provide yet another thrust to its stock price and continue its journey north; and there is a good probability that the company would deliver. Tune into this space again next week for the complete analysis of Micron’s earnings and for more insight regarding its prospects going forward.


Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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