Micron (MU) Q1 earnings preview: The worst may be over but headwinds linger

After ending the last fiscal year on a dismal note, Micron Technology (NASDAQ: MU) is betting on the recent improvement in demand conditions in the microprocessor market, though there are concerns about the persistent slowdown.

The Boise, Idaho-based chipmaker is set to unveil first-quarter earnings on December 18 at 4:00 pm ET. In a sign that most of last year’s challenges continued in the early months of the current fiscal, Wall Street forecasts an 84% fall in November-quarter earnings to $0.47 per share, on revenues of $5.02 billion.

Also see: Micron Q4 2019 Earnings Conference Call Transcript

What has changed since the last quarter is an uptick in memory card prices, which is estimated to have worked in favor of Micron. Also, the recent improvement in Sino-US trade relations bodes well for the company, for which China is a key market. Going forward, the recovery is expected to be complemented by the growing demand from the 5G market.

Focus on Margins

One of the key metrics that need to be tracked is gross margin, in view of the market’s prediction for a decline in gross profit. Variations in margin performance can be reflective of the effectiveness of the management’s efforts to reduce production costs. However, faltering sales and rising inventory, due to the market slump, might have weighed on margin growth this time. In short, the upcoming results will give a clear indication of where the memory card market is headed.

Outlook

Currently, the 12-month average price target on the stock is $55, which represents an 18% upside, and analysts recommend buy. Micron bulls are of the view that the company is well-positioned to cash in on its technological prowess and dominate the DRAM market in the future, outpacing most of its rivals.

Micron’s recent investments have been attractive, though they might have added to its relatively high debt. That brightens the prospects of an uptick in shareholder value and makes the stock an investment option worth considering.

Q4 Profit Falls

Micron lost significant market share a few months ago after it reported downbeat results for the fourth quarter, marked by double-digit drop in earnings and revenue amid weakness across all business segments. The only relief was that the results came in above the estimates.

Related: Micron (MU) set to dominate chip market next year

It took several weeks for Micron to fully recover from the post-earnings rout that crushed the stock. Having gained 51% since the beginning of the year, the stock once again traded above the $50-mark this week.

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