Micron Technology (NASDAQ:MU) Q2 Analysis


Shares of Micron Technology (NASDAQ:MU) slid 6% on Friday, in line with the rest of the market. Over the weekend, investors have been attempting to analyze the spike downwards.

On a broader market level, they are also assessing whether the sharp fall in the overall market is an indication of softness in the macro environment (which would obviously be a material negative).  Putting this into perspective, market volatility was likely due to portfolio allocation at the start of calendar Q2. Premium valuation for technology companies such as Twitter (TWTR) and Netflix (NFLX) may have also lead to profit taking.

All of which are likely triggers for the downturn. However, traders have suggested that the buy side still believes that core fundamentals remain intact.

Micron is a different story, as the company faces multiple company-specific headwinds. New guidance suggests profit contraction, consistent with investor concerns regarding inventory hikes, pricing pressure, and weaker-than-seasonal chip demand.

As a recap, the semiconductor company reported Q2 FY14 earnings that beat the street. Revenue came in at of $4,107 million, up 2% sequentially, while operating EPS of $0.85 was $0.09 above consensus estimates.

Notably, the bottom line benefited from higher equity income and lower taxes, which analysts give less credit for. Dynamic Random Access Memory (DRAM) sales were flat quarter-over-quarter while average selling prices (ASPs) fell by 1%.

Analysts believe that consolidation in the future is likely as vendors attempt to maintain profitability. This makes sense as operating margins are currently in the high 20% range, which are above peers, such as Teradyne’s (TER) margins (which only average about 20%).

Trade NAND sales increased 11% with bits up 35% and ASPs down 18%. Margins were down 500 bps sequentially; management outlined its outlook for further declines next quarter owing to concerns about increasing supply trends.

On valuation, assuming 10x on base case FY14 earnings of $2.50 would equate to a price target of $25. The stock closed on Friday at $22.58, down 5.92%.

Worth noting, consensus for FY14-15 earnings is still fairly bullish due to lofty ASP and lower cost assumptions.

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