Micron Stock Bubble Pop After Earnings! Buy at Dip or Solid Fall?

$Micron Technology(MU)$ $SUPER MICRO COMPUTER INC(SMCI)$ $Taiwan Semiconductor Manufacturing(TSM)$

Micron recently reported its quarterly results, and at the time of making this video, the stock has dropped by 12%, trading at $91.33. At the start of the year, Micron's stock was at $85.34. This is surprising given the business's rapid growth, resulting in a market cap of just over $100 billion. Despite this, the valuation still seems low, sitting at under 12 times earnings based on analysts' projections for fiscal 2025 and 2026. Micron remains a high-growth company, though analysts anticipate a decline in sales and EPS by fiscal 2027.

Looking ahead, Micron HBM4 is expected to ramp up in 2026, and the average analyst price target is currently 40% above the recent market close. However, with the guidance miss, we may see downgrades soon. Short-term pressures are likely, exacerbated by Jerome Powell's remarks on fewer rate cuts in 2025, which caused the market to dip.

CEO comments highlighted record data center revenue and expectations for growth in the latter half of the fiscal year. While demand for HBM remains strong (with supply sold out for 2025), price increases won't apply to existing orders.

Earning Overview

Revenue: $8.71 billion, a 12% increase from the prior quarter's $7.75 billion and an 84% rise from $4.73 billion in the same period last year. GAAP Net Income: $1.87 billion, or $1.67 per diluted share, compared to a net loss of $1.23 billion, or $1.12 per share, in the same period last year. Operating Cash Flow: $3.24 billion, slightly down from $3.41 billion in the prior quarter but significantly up from $1.40 billion in the same period last year.

The quarter's performance was driven by strong demand for memory chips used in AI servers, with data center revenue increasing over 40% sequentially and more than 400% year over year. Notably, data center revenue accounted for over 50% of Micron's total revenue for the first time. However, These projections fall below Wall Street's expectations of $8.94 billion in revenue and earnings of $1.91 per share.

Fundamental Analysis

Despite delivering a double beat (revenue and free cash flow) this quarter, Micron's guidance fell short. Revenue guidance for the next quarter came in at $8.96 billion, significantly below expectations. On the positive side, data center revenue grew over 400% year-over-year and 40% sequentially, surpassing 50% of total revenue for the first time. HBM shipments outperformed plans, with Micron's HBM3E now integrated into NVIDIA's latest platforms.

Q1 FY2025 (Most Recent Quarter):

• Revenue: $7.69 billion (down 6% YoY)

• Net Income: $1.45 billion (down 11% YoY)

• Gross Margin: 41.3% (slightly lower than the previous quarter, impacted by cyclical pricing pressures in memory)

• Operating Margin: 25.2%

Guidance

Revenue guidance for next quarter is $7.9 billion, missing expectations by $1 billion. DRAM and NAND bit shipments are expected to decline before rebounding in the second half of fiscal 2025. Despite short-term challenges, Micron anticipates improved profitability and positive free cash flow later in the year. Weaker outlook due to inventory reductions and seasonality affecting DRAM and NAND bit shipments.

For fiscal 2025, Micron expects demand for DRAM and NAND to grow, though near-term challenges remain due to inventory adjustments and market dynamics. Free cash flow was positive at $112 million, though no share buybacks occurred this quarter. The company continues paying dividends, with the next payout of $0.11 scheduled for January 15.

Free Cash Flow

Free Cash Flow: $3.24 billion This strong free cash flow performance reflects Micron's ability to generate substantial cash from operations, despite the volatility in the semiconductor industry. The company's focus on cost management, efficiency, and capital allocation contributed to this solid FCF figure.

Micron's ability to maintain positive free cash flow is important for its financial flexibility, allowing it to invest in growth opportunities, reduce debt, and return capital to shareholders through stock buybacks or dividends

Technical Analysis

Analysts have a more optimistic outlook, with a target price range of $140-$150 per share. This reflects confidence in Micron’s future growth, particularly driven by AI, data centers, and other technological advancements.

Support Levels: The next support area is around $70-$75, with multiple tests of this level. If the price falls below this support zone, it could face further downside.

Resistance Levels: The $130-$135 range has acted as resistance. A breakout above this level could signal a return to a bullish trend.

Risks and Challenges

Nevertheless, there are concerns: customer inventory reductions and seasonality are impacting Q2 bit shipments more than anticipated. Micron expects this to be a short-term issue, projecting healthier inventory levels by spring and stronger shipments in the second half of fiscal 2025.

Overvaluation Concerns: Despite the long-term growth potential, Micron’s valuation metrics (P/E and P/S) suggest that the stock may be overvalued.

Cyclicality of Memory Industry: Highly volatile pricing of DRAM and NAND chips impacts profitability during downcycles.

High Capital Expenditures: Continuous investments in manufacturing and R&D for competitive advantage.

Dependence on China: Geopolitical tensions and restrictions on selling to Chinese firms (like Huawei) create uncertainty.

Valuation

P/E Ratio: Micron's forward P/E of 33.5x is higher than competitors Samsung and SK Hynix, reflecting investor optimism about its growth in AI-driven demand.

P/S Ratio: Micron's 3.1x indicates it trades at a premium compared to competitors, suggesting expectations of higher future revenue growth.

EV/EBITDA: Micron's EV/EBITDA ratio is slightly below the industry average, suggesting a reasonable valuation relative to earnings.

Projected Free Cash Flows (FCF) Over 5 Years

Discounted Cash Flow (DCF) Analysis : Fair Value Estimate per Share: $64. The DCF approach suggests that, based on projected cash flows and growth assumptions, Micron’s intrinsic value could be around $64 per share. This is lower than its current market price (~$120), indicating it may be overvalued based on this model.

Market sentiment

Positive Sentiment: Investors are generally positive about Micron's long-term prospects, driven by The AI boom and the need for advanced memory solutions for AI models.Strong Q1 FY2025 results, with a notable increase in data center revenue, now representing over 50% of Micron's total revenue.Robust financial performance in recent quarters, including a strong operating cash flow and increasing demand for memory chips in cloud computing and data centers.

Concerns: Despite optimism, there are a few key concerns driving caution in the market Cyclical Nature of the Memory Market: Micron's revenues are highly sensitive to fluctuations in memory prices. Periods of oversupply or weak demand can lead to sharp declines in profitability.Guidance for Q2 FY2025: The company’s weak guidance for Q2 2025, which fell below Wall Street expectations, triggered some short-term pessimism. Micron forecasted $7.9 billion in revenue (plus or minus $200 million) and $1.43 non-GAAP EPS, lower than analysts' expectations.Geopolitical and Trade Risks: Concerns over US-China tensions and the potential for restrictions on sales to Chinese companies (e.g., Huawei) have raised uncertainties.

Conclusion

Stock Price Reaction After the Q1 FY2025 earnings report, Micron’s stock experienced a sharp decline of over 13% in after-hours trading due to weaker-than-expected guidance for the next quarter.The overall trend in the stock price has been volatile, with large swings tied to the semiconductor market cycle, global macroeconomic conditions, and Micron’s quarterly results.

While the stock is down to around $90 after weeks near $100, this could present a long-term buying opportunity. However, for those trading around earnings, like me, it looks like a loss—sometimes you win, sometimes you lose. Given its current market price of around $90-120, the stock could be somewhat overvalued based on intrinsic valuation methods, though some analysts remain bullish on its growth potential in the AI and data center sectors, which could justify higher future valuations.

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