Is Micron (NASDAQ: MU) Worth The Risk?

Despite posting a resounding beat on analyst expectations for their Q3 earnings last week, shares of chipmaker Micron (NASDAQ: MU) have been trading fairly soft since then. They’ve been trending down since April, and coming into last week’s release were already down more than 20% from the multi-year high they’d set at the time. Since the latest report, they’re down a further 7%. 

You’d be forgiven for thinking that the opposite should have happened. Their GAAP EPS was a solid $2.39 while revenue was well north of $8 billion and up more than 36% on the year. For many other companies, be they tech or not, this would have been enough to spark a fresh rally higher. Not so for Micron. 

The main culprit for the lackluster response seems to have been management’s forward guidance for the first quarter of 2022. They said they’re now expecting revenue to come in around $7.65 billion which is a fair bit off the $8.5 billion analysts had been forecasting. Management’s expectation of a $2.10 non-GAAP EPS print was also soft against the consensus for $2.48. 

Positive Spin

CEO Sanjay Mehrotra still made an effort to strike a positive tone with the report, pointing out how “Micron’s outstanding fourth-quarter execution capped a year of several key milestones. In fiscal 2021, we established DRAM and NAND technology leadership, drove record revenues across multiple markets, and initiated a quarterly dividend. The demand outlook for 2022 is strong, and Micron is delivering innovative solutions to our customers, fueling our long-term growth.”

Still, there’s no doubt that investors have yet to buy into his optimism en masse, and for those of us on the sidelines, this is a red flag for now at least. The company’s lower forecast stems from both direct and indirect supply chain issues which have been well publicized for the past couple of weeks. A consistent shortage of key components has meant Micron has struggled to meet its output and delivery targets, and so as a result its sales and revenue figures are hurting. 

Morgan Stanley digested the report and reiterated their Equal Weight rating on the stock, saying they remain cautious as there’s no sign just yet of an improvement in the supply chain. Mizuho trimmed their price target but remained bullish on the whole, the reduced $90 price target suggesting there’s still upside of some 30% to be had from Wednesday’s closing price. In a similar vein, Deutsche Bank reiterated their Buy rating as did Barclays. The latter in particular is anticipating a “more muted near-term environment before a 2H recovery."

Considering The Opportunity

There’s a lot to chew on here for potential investors, but the question has to be asked, is Micron worth the risk now with so many other options out there? Whatever way you look at it, the fact is their shares have been trending down for the past six months and if a solid earnings beat like the one delivered last week goes unnoticed, you have to be thinking there’s more room for them to fall. It might have been the darling of tech portfolios for much of the past decade but shares are facing a fresh headwind that is for the most part outside the company’s control.  

If there is a silver lining on any of these clouds it’s that Micron is not alone in the chip-making space when it comes to dealing with these supply chain issues. The likes of Intel (NASDAQ: INTC) and  Lam Research (NASDAQ: LRCX) have also had to watch their shares retreat steadily throughout the summer from what had been looking like a year-long rally. 

It’s fair to assume that by the end of the year both Wall Street and the chipmakers will have much better visibility on the supply chain side and, fingers crossed, things will be starting to return to normal by then. In the meantime, it looks like shares will continue to trade softly relative to the rest of the tech industry but investors would do well to keep an eye on Micron for when they start coming back. As we’ve seen time and time again in recent years, it doesn’t take much for their shares to take off.