Micron Action Comes To A Simmer Ahead Of Q2 Results

Key Points

• Micron shares come to a simmer ahead of the Q2 earnings report. 
• Sell-side activity is on the rise and helping to support the market. 
• The analysts do not expect a great report and have set the bar very low. 

Shares of Micron NASDAQ: MU hit their bottom late last year and are now set up for a complete reversal. The market action ahead of the Q2 earnings release suggests that sell-side interest is growing in the face of expected outperformance. The analysts have been lowering the bar for revenue and earnings for the last 12 months, and it hit a  new low in March.

The latest downward revision comes from Citigroup NYSE: C, which cut its outlook for top and bottom-line results due to an expected inventory-related write-down. Inventory has been a big problem for the memory chip market for years; the write-down is not a positive for share prices but may already be priced into the stock. Once it comes, the market can focus on future results and a return to profitability. 

Sell-Side Interest On The Rise For Micron 

The analyst's activity is mixed, to be sure. The Marketbeat.com consensus rating has held steady over the past 12 months, but the price target is trending lower and hitting new lows just this month. The caveat here is the most recent activity is bullish; the downward pressure in the consensus price target is due to old data falling out of the equation. The most recent 2 analyst reports come from Raymond James and Mizuho, which have the stock rated at Outperform/Buy with a 2-analyst consensus price target of $71. That target is another 7.5% above the current consensus, which still expects an 8% upside relative to the recent action. 

Institutional activity is even more bullish. The institutions have been buyers on balance for 4 of the last 5 quarters, and their buying activity hit a high in Q1 2023 not seen in a year. The institutions bought a net $2.42 billion worth of shares, equal to 3.6% of the market cap. That brings total purchasing to a net $5.93 billion for the 5 quarters or almost 9% of the current market cap, with total holding up to 78% and growing. That is a substantial tailwind for share prices and will help to move the stock higher, assuming Q2 results are good enough. 

What are the analysts expecting? The consensus is that revenue will fall more than 50% to $3.72 billion. Earnings are expected to be negative due to expected write-downs and may even exceed the consensus target. The upshot is that analysts remain bullish on the stock and see the writedowns as favorable for the company’s long-term health. 

Analyst Christopher Donnelly of Citigroup says, "While we expect another lowering of estimates, our reasons to be positive on MU remain unchanged – we believe capex and utilization cuts by Micron and Hynix should create a bottom to the DRAM market over the next six months, and MU is trading close to a trough valuation,” concluding with the thought markdowns will help the company clear inventory. 

The Bottom Is In For Chip Stocks 

The sentiment in Micron is consistent with bottoming across the microchip industry. Results from companies like Advanced Micro Devices NASDAQ: AMD, NVIDIA NASDAQ: NVDA, and ONSemi NASDAQ: ON show resilience even though there are YOY declines in some end markets. The takeaway is that inventory issues are approaching normalization while a shift toward next-generation technology supports current operations. The Semiconductor Index is forming a bottom because of it and is on the verge of breaking out. 

Regarding Micron stock, its market echoes the bottom indicated by the SOXX index NASDAQ: SOXX. The caveat is that price action is range bound at this time and may remain so even with a solid report. The next big catalyst for share prices might not come until later in the year when there is an actual improvement in results.