After Catching Up With Micron, I'm Not Letting It Get Away
Here's my trading plan — and price target possibility — for the AI memory chipmaker as it readies for quarterly earnings.
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We all know that the buildout of the Data Center and the buildup of generative artificial intelligence require more than an incremental increase in the generation of energy. These changes in the way America does business also require the high-tech semiconductor chips that make up AI infrastructure, can work with large language models and can move toward AI-inferencing.
This whole hop, skip and a jump into the unknowable future also requires another kind of chip. Memory chips. Oodles and oodles of memory chips. This has created shortages for high-bandwidth, high-speed DRAM chips which are the AI chips of choice, but also shortages of more mainstream, cost effective DRAM chips and even NAND (flash) chips. The top U.S. choice for these chips is and has been Micron Technologies MU. Micron's top competitors for that high-end marketing are both South Korean, SK Hynix and Samsung Electronics.
No U.S. competitor competes in the high-bandwidth market for AI memory chips with Micron, but two U.S. competitors, Western Digital WDC and Seagate Technology STX do compete in the data center / hardware storage market. All of these stocks have been in tremendous demand. As I work on this piece on Tuesday morning, MU has traded higher for nine consecutive days adding 48% over that time.
I mentioned MU's run twice last week in my Market Recon column. WDC and STX are both also on long, significant winning streaks. My focus, though, is currently on Micron as that firm will go to the tape next Tuesday with its fiscal fourth-quarter financial results and for the fact that I am long the shares.
A Look Back
For its fiscal third quarter, Micron posted an adjusted EPS of $1.91 on revenue of $9.3 billion. These top- and adjusted-bottom line numbers both crushed Wall Street's expectations, while that sales print was good for year-over-year growth of 36.6%. That was a tenth consecutive quarter of growth at this annual level or greater after having suffered five consecutive quarters of year-over-year sales contractions from the August 2022 quarter through the August 2023 quarter.
At that time, Micron guided the quarters to be reported next week toward revenue of around $10.7 billion on a gross margin of around 42% that would produce adjusted earnings of about $2.50 per share. Currently, Wall Street is expecting to see an adjusted earnings per share of $2.86 on revenue of $11.1 billion. That would not only decisively beat Micron's own guidance but compare favorably to $1.18 for the year-ago period, while reflecting revenue growth of 43.4%.
Very interestingly, of the 21 sell-side analysts that I can find that cover MU, 20 have revised their earnings estimates for the quarter higher since it began, while one has sat on his hands. No analysts have revised their estimates lower. This (Tuesday) morning, Vijay Rakesh of Mizuho Securities, who is rated at 5 stars by TipRanks, reiterated his "buy" rating on MU while increasing his target price to $182 from $155. On Monday, CJ Muse of Cantor Fitzgerald and Timothy Arcuri of UBS (both rated at 5 stars) reiterated "buy" ratings and increased their target prices from $155 to $185. Either this is going to be one heck of a release by Micron, or all of the smart guys are copying each others' homework.
My Thoughts
Interestingly, MU is trading at just 19-times forward looking earnings, which may underestimate just how important the memory story is to the AI-driven future. I am long the stock, but I was late to the party, as my focus had been on the infrastructure and inferencing side of the story, which is where Nvidia NVDA and Advanced Micro Devices AMD live, but not memory.
Readers will see that MU broke out of a late June through mid-August Cup with Handle pattern with a $128 pivot in early September. That would put the target price using my model at $153, which has been exceeded. Is the stock extended? Well, yes. Relative Strength is in a technically overbought state. The daily Moving Average Convergence Divergence is also looking like it's just too bullish in my opinion. Should investors take profits? I will be, but I'm not going flat the name. I don't like holding onto stocks that run wild going into earnings. You all know that.
That said, MU has taken and is trying to hold above the stock's June 2024 high. Using that $157 as a pivot, post Fed, and post earnings, assuming the guidance is positive, a new target price could be as high as $188.
This is what those other analysts are looking at, as it would put us all in the same ballpark. Bottom line: I will not be selling all of my shares. MU has a chance to end up where Nvidia was a couple of years ago, as the chip of choice for necessary capital spending. Micron is in the Sarge-folio to stay. It's now just a matter of trading the shares properly as I grow the position.
At the time of publication, Guilfoyle was long MU, NVDA, AMD equity.
