Micron Technology (MU) closed on Friday down 2.9% to $44.74 after the chip giant tempered forward guidance despite a quarterly earnings beat.
The pullback in shares brings the return to shareholders this quarter to a negative 15.3% only one week from the quarter's close.
MU fell as much as 4.9% in Friday's trading and had been down some 7% in after-hours trading Thursday evening after the firm guided the current quarter's earnings to $2.88 to $3.02 per share vs. the $3.08 that analysts had been expecting. The company also forecast $7.9 billion to $8.3 billion in quarterly revenues vs. analysts' $8.45 billion consensus estimate.
The drop in the share price comes as analysts are almost universally tempering their own earnings estimates for the company. Seventeen of the 18 analysts who published research on the company so far in September have cut their price targets, according to FactSet data.
Pricing and Inventory Woes
Two other issues that Micron raised in Thursday evening's earnings call that are weighing on the stock are DRAM pricing and short-term customer-inventory adjustments.
Morgan Stanley equity analyst Joseph Moore wrote in a note Friday that "we expect producers to build inventory in the second half that remains an overhang beyond November, in line with cycle concerns we have raised. Implied producer inventory build should act as a negative for future prices."
The inventory concerns are set to be exacerbated by pressure on memory pricing. A TrendForce report recently forecasted that pricing pressures are set to impact the industry more heavily than expected, particularly due to shortages at chip-leader Intel Corp. (INTC) .
"DRAMeXchange, a division of TrendForce, previously estimated that the contract prices of PC DRAM products will drop by around 2% quarter over quarter in 4Q18 as the market gradually shifts into oversupply," the report states. "However, it is now possible that the price decline will become larger due the shortage of Intel CPUs and lower demand for notebooks and PC DRAM in a row."
The confluence of these factors is raising the caution flag for analysts.
"We expect Micron shares to remain volatile until we see the rate of price declines moderate," Nomura Instinet analyst Romit Shah wrote in a note Friday morning. "As such, we are resetting estimates and lowering our target price to $65."
Micron also said on Thursday's earnings call that looming 10% U.S. import tariffs on $200 billion of Chinese imports will cut gross margins by up to 100 basis points, although Chief Financial Officer David Zisner said "we are working to gradually mitigate most of the impact from these tariffs over the next three to four quarters."
"Tariff related cost increases impacted revenue, gross margin, and earnings per share guidance," J.P. Morgan analyst Harlan Sur wrote this morning.
The trade-related impact is set to sting the chipmaker's margins for the next several quarters, which is furthering tempering estimates.
Sur, for example, cut his price target from $84 to $75, though he maintained his buy rating.
Buybacks and Buying Opportunity
Buy ratings were maintained by most analysts, even as they cut their price targets and urged caution on the uncertain short term for the technology leader.
One thing buoying the shares is the recently accelerated buyback program the company is pursuin.
"We certainly view our stock as being undervalued at current prices and are aggressively implementing our stock buyback program," CEO Sanja Mehrotra told analysts. "We will continue to maintain a healthy balance sheet and use strong free cash flow to support our $10 billion buyback and assess opportunities to accelerate the timeline for its completion."
Some analysts said that given these type of tailwinds, investors should hold on for the long term growth upcoming.
Keybanc Capital Markets Weston Twigg wrote Friday that "we remain bullish on Micron's long-term upside. We believe investors should be opportunistic buyers on likely headline and model risk over the next two to three quarters."
The Bottom Line
While many analysts are maintaining their bullishness on Micron for the long term, the stock is difficult to trade at the moment due to its cyclical nature.
Analysts are extremely wary of near-term choppiness related to broad industry issues and a trade war that's out of Micron's control. As such, the stock's outlook seems opaque until markets can better understand the headwinds that the company faces.
In the meantime, expectations are getting more conservative.