Micron Technology (MU) was trading some 3% lower at $44.74 shortly before 1 p.m. ET Friday after the chip giant tempered forward guidance despite a quarterly earnings beat.
MU fell as much a 4.9% earlier in the session 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.
That hurt the stock even though Micron reported an earnings beat after the bell Thursday. The company said that its fiscal fourth-quarter earnings rose to $4.33 billion ($3.56 per share) vs. $2.37 billion ($1.99 a share) in the same period last earlier. After including one-time items, that worked out to $3.53 in adjusted EPS vs. the $3.33 that analysts had expected. Revenues also beat analyst expectations, coming in at $8.44 billion against analysts' $8.25 billion forecasts of up from $6.14 billion in the same period last year.
Still, analysts are almost universally tempering their own earnings estimates for the company. A staggering 17 of the 18 analysts who published research on the company so far in September have cut their price targets, according to FactSet data.
For example, Nomura Instinet's Romit Shah cut his MU price target all the way down to $65 a share from a previous $100. "We expect Micron shares to remain volatile until we see the rate of price declines moderate," Shah wrote in a note Friday morning. "As such, we are resetting estimates and lowering our target price to $65."
While Shah remained bullish in the long term, he predicted that management's lowered guidance and some headwinds in DRAM pricing and international trade threaten to give the stock a rocky short-term future.
Pricing and Inventory Woes
Two other issues that Micron raised in Wednesday evening's earnings call that are weighing on the stock are DRAM pricing and short-term customer-inventory adjustments.
"There is some limited inventory adjustment underway at a few customers," Micron CEO Sanjay Mehrotra said during the call, noting that certain customers are adjusting how many chips they buy. TheStreet's Jim Cramer called that "code" for customers overbuying chips amid ongoing industry supply concerns, leaving them likely to purchase fewer chips later on.
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."
Meanwhile, Goldman Sachs analyst Mark Delaney recently downgraded to "Neutral" from a previous "Buy," writing on Sept. 12 that customers "now have more inventory on hand, and as current projects wrap up, there is more of a focus on price instead of just getting supply at any cost."
He added that such sales downturns "usually last for several quarters and can see an acceleration in price declines, as customers delay procurement to wait for lower prices when possible -- causing a snowballing effect. That can lead downturns to be worse than initially anticipated by investors."
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."
Still, such a multi-quarter drag on results spooked analysts about not just Micron, but about the chip sector in general. "MU is the first to report after the recent tariff increase," KeyBanc Capital Markets analyst Weston Twigg pointed out in a note. "We're concerned that the trade war could create a ripple effect through the [entire] industry that lowers demand for a few quarters."
Twigg trimmed his MU price target to $73 from an earlier $80, writing that "near-term issues trump long-term opportunity."
Will Buybacks Save the Day?
On the plus side, Micron has taken a page out of the playbooks of Qualcomm (QCOM) and NXP Semiconductor (NXPI) and plans to buy back 20% of the company's shares outstanding. Management announced the program over the summer and said during Wednesday's call that it might even speed purchases up.
"We certainly view our stock as being undervalued at current prices and are aggressively implementing our stock buyback program," CEO 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."
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 fairly bleak until markets can better understand the headwinds that the company faces.