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Should You Buy This Beaten-Down Growth Stock Before Earnings? | The Motley Fool

Investor sentiment has turned against Micron Technology (NASDAQ:MU) over the past few months because of concerns that memory chip prices might soften based on a slowdown in demand and an increase in supply. As a result, shares of the memory specialist have lost 14% of their value in the past six months.

But concerns about a glut in memory supply seem overblown as the demand for dynamic random access memory (DRAM) and NAND flash memory isn’t going to fizzle out anytime soon thanks to multiple catalysts. Micron’s upcoming fiscal 2021 fourth-quarter results, which will be released on Tuesday, Sept. 28, could help bust the myth that the memory market is set for a decline. Let’s see why.

MU data by YCharts.

Micron Technology is going to deliver solid results once again

Micron anticipates $8.2 billion in fourth-quarter revenue at the midpoint of its guidance range. The company has forecast adjusted earnings of $2.30 per share, with the adjusted gross margin expected at 47%. Those numbers point toward huge improvements over the year-ago period when Micron clocked $1.08 per share in earnings, $6.06 billion in revenue, and an adjusted gross margin of 34.9%.

Meanwhile, Wall Street expects $2.33 in EPS on $8.22 billion in revenue. The expectations are slightly higher than the midpoint of Micron’s guidance range, but the company shouldn’t have much difficulty beating them. It has a history of easily beating Wall Street’s earnings expectations, and a robust demand environment indicates that it can do the same once again.

The company had pointed out in its June earnings conference call that memory demand from data centers is anticipated to improve in the second half of 2021. The launch of new server CPUs (central processing units) equipped with more memory channels, the stronger demand from cloud service providers, and a recovery in enterprise demand will be the catalysts for data center memory.

Memory industry research firm TrendForce estimates that the contract price of server DRAM could increase between 5% and 10% in the third quarter of 2021 due to a favorable demand environment. The PC market is going to be another tailwind for Micron as shipments are expected to increase 14% in 2021, according to IDC, which was originally expecting stronger growth of 18%. But supply constraints have forced IDC to temper its forecast.

Adult male looking at a line chart on a laptop.

Image source: Getty Images.

However, strong PC demand is predicted to spill over into 2022 and beyond, with the market expected to record growth through 2025. TrendForce estimates that PC DRAM prices increased 3% to 8% quarter over quarter in the third quarter of 2021. The firm is forecasting a sequential decline in the range of 0% to 5% in the fourth quarter because of high channel inventory at PC original equipment manufacturers (OEMs), which reportedly have sufficient stock of DRAM. But the bigger picture appears bright, and PC DRAM prices could start moving north once the restocking begins.

Meanwhile, mobile DRAM prices are expected to increase in the mid-single percentages in the final quarter of the year. The launch of Apple‘s iPhone 13 as well as inventory restocking by Chinese OEMs could support mobile DRAM prices.

All of this indicates that Micron’s impressive business momentum could continue until the end of 2021. That’s probably why analysts are looking forward to bright guidance from the memory specialist. Wall Street expects Micron to call for $2.63 in EPS on $8.68 billion in revenue for the first quarter of fiscal 2022, currently in progress. That would translate into a huge jump from the prior-year period’s $0.78 EPS and revenue of $5.77 billion.

The bigger picture remains bright

Micron Technology’s terrific growth is expected to continue in fiscal 2022. The company’s revenue is anticipated to increase 32%, and EPS is expected to jump to $11.17 from fiscal 2021’s estimated $5.98. That’s not surprising as the growth drivers discussed above are likely to push memory demand higher.

For instance, the demand for DDR5 DRAM, which will replace the DDR4 standard, is expected to pick up the pace in 2022 and beyond. According to third-party estimates, the faster DDR5 memory could account for 10% of the overall DRAM market in 2022 and 43% in 2023. It is worth noting that the price of DDR5 memory is expected to be 30% higher than DDR4, driving the DRAM market’s revenue higher in the process.

Additionally, DDR5 memory is expected to have four times the density of DDR4. More specifically, DDR5 can pack up to 64 GB of DRAM in a single-die package as compared to 16 GB for DDR4, paving the way for an increase in volumes. Throw in the increasing memory capacities of 5G smartphones and the growing adoption of DRAM in markets such as automotive (where demand is anticipated to grow at 30% a year for the next three years), and the market Micron operates in is likely to stay healthy.

As such, buying Micron Technology stock going into its earnings report looks like a good idea, since strong results could help improve investor confidence. And given that this growth stock is trading at just 6.5 times forward earnings as compared to the S&P 500‘s multiple of nearly 22, the case for buying it becomes stronger.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


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