- Micron’s stock lost a quarter of its value in the last six months.
- The company’s unamusing outlook for Q2 signals that the upside is limited right now.
- Micron is a SELL for us at the current price.
The memory-chip company Micron Technology, Inc. (NASDAQ:MU) last month posted a weak outlook for Q2 where it expects to make $7.9 billion in revenues against the consensus of $8.94 billion. We see this as a red flag, which might signal that the upside is limited and the government’s decision to grant $6.16 billion in funding might not be enough to scale the business and increase the company’s market share at the same time. Micron also faces other major risks, which in our opinion make its stock risky to invest in. Our valuation model also suggests that the company is a SELL right now.
The Outlook Is Unamusing
Micron’s stock had a great performance in the first half of 2024, but later lost nearly all of its value and closed the year near the 52-week lows. Despite the increased demand for memory chips, Micron has been releasing a disappointing outlook, which made the market less excited about the stock. Its latest guidance for Q2 was also poor as Micron expects to make only $7.9 billion in revenues against the consensus of $8.94 billion.
The company’s management has also admitted that the demand for industry NAND for 2025 is below their prior expectations and will be in the low single digits. A similar thing is expected to happen with the mobile business as the smartphone unit volumes are also expected to be in low-single-digit percentage growth this year. This shows that the inventory buildup and the seasonality effect within the industry now might have a sufficient impact on shipments and even margins, especially in Q2. The gross margin is already expected to contract by 100 bps to 38.5% against the consensus of 39.5%, while the EPS is expected to be only $1.43 per share in Q2 against $1.79 per share in Q1.
Such an unamusing outlook in our opinion makes Micron an unattractive investment. While the company’s forward P/E multiple of 14x could signal that the stock is cheap, the guidance provided by the management itself shows that the aggressive growth witnessed at the start of 2024 is not there anymore. Since the revenue growth rate itself is expected to normalize, the growth opportunities are likely to be limited at this point.
Also, while Micron has been granted federal funds to scale its business, it still expects to have record capital spending this fiscal year. As we’ll show later in this article when we describe our valuation model, an enormous CapEx will likely affect its ability to generate significant FCF this year. That is why the decline of Micron’s stock in the last half a year makes sense to us and a further decline is more than a possibility in our opinion.
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