Micron’s Bad News Is Not Time To Sell, It Only Brought Time To Buy Closer (MU)

What to do: buy or sell? A dice with answer options.

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It has been a very unfun summer for Micron (NASDAQ:MU) bulls, who have taken one punch after another. Whether it’s due to economic or recessionary pressures in end markets or customers adjusting inventories, the hits keep on coming to Micron’s earnings estimates. But, contrary to the herd mentality, the time to sell is not now – not after the bad news is in the open. Instead, the time to buy is coming soon, as soon as earnings estimates stop dropping.

Thanks to Tuesday’s preannouncement, not only was a lower FQ4 estimate provided, but it went on to include downbeat FQ1 guidance, saying the company expects “significant sequential declines in revenue and margins” from FQ4 to FQ1. This is definitely not the kind of news you ever want to hear, let alone less than six weeks after providing original guidance – which was below consensus to start.

But, the cuts to earnings we’ve seen since June’s earnings report were already priced in with the decline in Micron’s stock over the last several months.

Naturally, you wonder, how can that be? Surely there can be even worse news at some point, news not factored in months ahead of time.

But notice how some terrible news for the current quarter and even the quarter still to come didn’t make the stock plunge; it closed down 3.8% on Tuesday. The market has a way of sniffing out things well in advance. So if Tuesday’s earth-shattering preannouncement didn’t make the stock sink like a rock, more than just a typical day for Micron, it’s at least somewhat priced in already.

This means it’s not the time to sell.

Considering Micron provided some of the worst, most surprising sequential guidance from one quarter to the next in June, and the stock was up as high as 21% in its aftermath, I’d say things were more than priced in with the months-long 44% drop leading up to it. And with the additional revision downward for both FQ4 and FQ1, the stock still maintained a rather decent equilibrium on Tuesday.

Sure, it hasn’t been digested fully yet, but news as bad as this is bumping up (relatively speaking) against a strong support level, not only on the chart but also in the valuation.

But aside from all the reasons for the news and all of the macroeconomic issues, none of it truly matters except the bottoming of consensus estimates. The Tuesday disappointment has only sped up the process of getting estimates to come down to correct levels for FY23 and, therefore, the bottoming process of the stock.

Earnings estimates have already been on a massive slide over the last three and six months, even before the recent news. So there’s another downward revision coming.

Micron's earnings revisions from seeking alpha

seekingalpha.com

Point being, FQ1 was already looking sequentially weak. Now it’s just a matter of baselining everything to a new level. We’re at stage two of the revision battle. Estimates will get brought down 20-30% across the board, and we’ll be close to finding a bottom.

Allow me to explain.

The stock ran out of steam as it reached $98 early this year because estimate revisions ran out of room. There were no further catalysts to drive them higher; thus, the market began pricing in potential cuts to those estimates. This drove the stock to the bottom, eventually bouncing in late June after the downward revisions were made a reality.

What will bottom the stock is the drying up of downward revisions. This is moving Micron through the cycle on paper. And since the market looks out two to three quarters, it’s approaching – and perhaps even reaching – the bottom of earnings in that time frame.

Don’t think of the news as today’s news; think of it as tomorrow’s catalyst. The news today provided a view into the future of the market’s expectations for recovery. There’s always an upturn in the memory industry; it’s just a matter of when. And the market always prices in the event ahead of time.

This is why it’s important not to follow the herd mentality even when it seems the news is at its worst and there may be more to come. The market already sniffed it out, and it’s recalibrating to the time frame of the recovery, pricing in if it’s within the next two to three quarters.

Not All This Deep Fundamental Stuff

If you were expecting a deeply technical, fundamental picture of Micron’s business and all the reasons for it to be seeing aggressively quick deterioration, I’m sorry to disappoint. Sometimes the answer is at a basic level. This macroeconomic environment is moving fast and with momentum, and it’s hitting companies like Micron, NVIDIA (NVDA), and Intel (INTC) with a blindsided backhand. None of them saw this level of deterioration coming at this rapid rate. Therefore, I’d be kidding you if I thought I could explain the memory and chip fundamentals as it currently stands. The industry executives couldn’t see it six weeks in front of them. I don’t have some magical insight beyond theirs to say when it will recover or which industry will roll over last.

This environment we’re in is hitting at an unprecedented rate. This is why I chose to bring it back to the basics. The market will move Micron’s stock higher once it can see the plateau of earnings revisions, but instead of the highs, it’s the lows.

There’s still time before accumulating shares, or LEAPs in the case of options. But the downside is limited as the company will remain financially strong with its relatively newly founded tech leadership (in terms of decades), stunning balance sheet, and exceptional execution through other recent challenging environments.

One-time book value always holds a special place in the hearts of Micron investors. It’s a love-hate relationship; sometimes, hating to love it is how you get by. But it’s a repeatedly proven level of support, and this time the company is the undisputed technology leader in DRAM and NAND, has a stunning balance sheet, and has built a track record of operational execution.

One-time book value plus cash gives the stock a cushiony bottom in the $50s. Don’t be surprised if the stock doesn’t have a material selloff from here. The market is sniffing out the bottom of estimates very acutely now that the worst news is public.

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