Micron (NASDAQ: MU) shares fell a significant 5% in after-market trading due to its Q3 results and guidance for Q4. However, nothing in the report gives cause to sell and every reason to buy. The results were better than expected; the company revealed market share gains in the critical data center/AI market, and the guidance is solid. The worst that can be said is that the guidance wasn’t a blowout, but that is compared to the expectations. The takeaway is that guidance is robust, the company has momentum, outperformance should be expected, and the uptrend in MU stock will continue.
Micron Has Impressive Quarter, but Market Fatigue Sends Shares Lower
Micron had a solid quarter, with results and guidance outpacing the MarketBeat.com consensus. The cause for the stock price decline is likely caused by market fatigue following the 70% rally this year and the 200% rally since last year. The report details are impressive, with revenue growing to $6.81 billion or nearly 82% compared to the previous year. Strength was centered in the data center and high-bandwidth markets, but market normalization or growth was seen in all segments. The data center strength is notable because Micron counts NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD) among its leading customers; each GPU and accelerator they sell equals a win for Micron.
The margin news is more impressive. The combination of ramping business, sales leverage, internal efficiencies, and lapping comps from last year resulted in a significant margin and cash flow improvement. Due to inventory normalization, the cash flow improved by 100% sequentially and roughly 100x compared to last year. The company logged billions in inventory write-downs last year that won’t be repeated this year. The takeaway is that GAAP and adjusted earnings reverse losses in the prior year, and the adjusted $0.62 is 1500 basis points better than expected.
Guidance is also solid but did not deliver the expected blowout. Regardless, the forecasted $7.60 billion in revenue and $1.08 in adjusted earrings are above the consensus estimates with a margin of error that can produce significant outperformance. The salient detail is that revenue will grow 10% sequentially to $7.60 billion or better to accelerate the YoY increase to 90% or greater. The guidance could be cautious because the ramp in the HBM memory market is still in its early phases, the company is already testing its next-gen HBM products, and an AI-driven PC/device upgrade cycle is just starting.
Highly-Valued Micron is a Cheap Stock to Own
Micron’s valuation relative to this year’s earnings is a concern. At 135x, it is more than twice as valuable as NVIDIA, but there is growth to consider. The analysts forecast revenue to double over the next year and for margins to expand. The consensus for earnings is a 700% increase, providing ample capital for reinvestment, balance sheet improvements, and capital returns. Given the earnings outlook, the dividend is small but positioned for a distribution increase, and share buybacks may also reenter the picture.
The analysts' response to the Q3 results is favorable. MarketBeat is tracking six revisions from 26 analysts showing high conviction. The field rates Micron as a Moderate Buy and sees it advancing at least 15% from the $135 level. The six fresh targets led to the high end of the analysts' range, near $175, and the highest target of $225 was reiterated. That target was set by Rosenblatt, which pegged the stock firmly at Buy.
Micron stock is in an uptrend but entered a consolidation phase that could keep it moving sideways for the next few weeks to several months. The outlook is bullish, but the market may want to see more before moving to a new high. In this scenario, the critical resistance is near $150, and support is at the 30-day EMA. If that level fails, Micron shares could slip another $5 to $15 before finding firm support.
