Time and time again over the last six months, chip stocks have shown a knack for reminding us just how low Wall Street's expectations are for the group, thanks to trade tensions and a cyclical downturn.
The strong rally that chip stocks are seeing following Micron's (MU) May quarter report is the latest case in point -- particularly given that chip equipment makers are joining chip suppliers in trading higher.
Certainly, much of what was shared via Micron's earnings report and call was far from rosy. The memory giant, whose shares are up 13% in Wednesday afternoon trading, issued soft August quarter guidance, with the midpoint of its revenue guidance range implying a 47% annual drop. It also reported another quarter of rising inventories and double-digit sequential drops in its DRAM and NAND flash memory average selling prices (ASPs), and forecast its capital spending in fiscal 2020 (it ends in August 2020) will be "meaningfully lower" than planned fiscal 2019 capex of about $9 billion.
But in a few ways, Micron's results and guidance were better than feared. May quarter revenue and EPS beat estimates in spite of a $200 million-plus hit from the suspension of sales to Huawei following the May arrival of U.S. export restrictions, and -- in line with an overnight New York Times report stating that Micron, Intel (INTC) and others are still supplying some chips to Huawei that aren't made in the U.S. -- Micron said on its call it has resumed shipping "a subset" of products to Huawei during the last two weeks after concluding that doing so would be legal.
In addition, while Micron maintained its full-year outlooks for NAND industry supply and demand growth, it slightly improved its full-year DRAM demand outlook in spite of the Huawei ban, while leaving its supply outlook unchanged. The company now expects mid-teens DRAM bit demand growth this year, compared with prior guidance of low-to-mid teens growth. "Healthy" bit demand growth is expected during the second half of 2019, as improved PC sales and normalizing inventories among cloud and graphics clients provide a boost.
Still, given what some of its numbers looked liked, it's hard to blame those who are surprised that Micron is seeing double-digit gains following its report, or that NAND rival Western Digital (WDC) is up over 7%. The same goes for those doing double-takes upon seeing that The Philadelphia Semiconductor Index (SOXX) is up over 3%, or (in light of Micron's capex comments) that Applied Materials (AMAT) , Lam Research (LRCX) , KLA-Tencor (KLAC) and other chip equipment makers are joining in on the fun.
But -- as I've noted before when talking about the strong gains many chip stocks have delivered this year -- the fact that many chip stocks have been trading at rock-bottom valuations at times when sentiment for the group is particularly weak can't be ignored when one sees them bounce in response to news that's at best mixed. In some ways, one could argue that what has been going on with the group is the polar opposite of the selloffs that fast-growing and richly-valued enterprise software firms have seen after delivering numbers that were good overall, but fell short of Wall Street's high expectations.
Though it could be a while for its earnings to rebound to this level, Micron went into its latest report trading for less than three times a fiscal 2018 EPS consensus of $11.95. Even if one deems the last DRAM boom cycle to be an anomaly and only expect Micron's EPS to reach half its fiscal 2018 level in a couple years' time, its stock was far from expensive.
Applied Materials and Lam Research, meanwhile, both traded for less than 10 times their fiscal 2018 EPS as of Tuesday's close. Likewise, a number of major chip developers, including Skyworks (SWKS) , NXP Semiconductors (NXPI) and ON Semiconductor (ON) , traded for 10 to 13 times what they earned during their 2018 fiscal years.
Though pessimism towards the group isn't as bad as it was last December, many chip stocks have still been pricing in both an extended cyclical downturn and considerable damage related to trade tensions and the Huawei ban. And in the case of Micron in particular, markets have arguably been pricing in a memory down-cycle comparable to what the company has seen in the past, when it has reported losses and at times has seen its DRAM prices fall below cash costs.
As a result, an earnings report and call that, despite featuring a fair amount of bad news, didn't validate such depressed expectations, is being very well-received.
