(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Micron Technology Inc.'s (MU) stock has risen about 5% since the start of 2018, recouping some of the significant losses the shares suffered at the end of 2017. But the gains may not be likely to last because despite strong fiscal first-quarter results on December 19, analysts continue to have a bearish outlook on the stock.
Part of the reason why the shares trade for only five times 2019 earnings estimates is because of the weak outlook for earnings growth. According to Ycharts, analysts are looking for earnings to decline on average by about 13% for 2019 and 2020. Those declining profits come despite projections of revenue remaining flat, suggesting analysts see margin erosion. (For more, see also: Micron Stock: Is the Rally at Risk?)
The chart below shows how earnings growth is expected to decline in 2019 and 2020, from $9.72 in 2018 to $7.35 in 2020. That decline may be the primary reason why investors are unwilling to pay a higher multiple for the stock and could be the reason why the stock has languished since its sharp decline at the end of November.
No Revenue Growth
Additionally, analysts are seeing no revenue growth for the company over the next three years, with revenue staying flat around $27.5 billion from 2018 through 2020. While DRAM pricing has been tight, as noted by Barron's, NAND is currently in oversupply. But the bigger question is how long these current pricing trends last, and that could be a reason why the outlook for revenue growth could be stale.
Since 2016, revenue has surged higher at Micron, but the chart below shows how analysts see that growth ending in fiscal 2018. The slowdown comes despite beating earnings estimates by nearly 11%, and revenue estimates by 6%, back in December. But with the stock languishing, perhaps it is the market's way of convening a message of uncertainty on the future direction of the company's growth. (For related reading, see also: Why Micron Is Poised to Rise 20%.)
Where Micron shares go from here, after a meteoric comeback in 2017, appears to depend on the perception and ultimately the reality of the business's fundamentals. At this point, estimates seem to support a reluctance on the good times continuing. But of course as the global economy continues to improve, the supply and demand balance could change very quickly, shifting the favor back to Micron.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.