- Micron looks set to deliver good Q4 numbers on October 4th, given the rebound in DRAM prices.
- But with short interest at its 52 week high, a miss on estimates could mean big trouble.
- Expect volatility to be high. Micron looks like a high risk, high reward bet.
Shares of Boise, Idaho-based Micron Technology (NSDQ:MU) carry the weight of heightened expectation and speculation going into this earnings season. With DRAM prices rebounding to 7 month highs, and key competitors stepping out of the race, Micron looks poised to deliver good numbers. That said, Micron has attracted its fair share of skeptics. With short interest at its highest in a year, whether or not Micron beats estimates, volatility is bound to be high. Micron looks set to jump post Q4 earnings, but it's a high risk, high reward opportunity.
Analyst Estimates & Price Targets
Analyst expect Micron to deliver $3.13 billion in revenue, and 13 cents in losses per share. That compares with a revenue of $3.6 billion, and 37 cents in Earnings Per Share (EPS), translating to YoY (Year on Year) declines of ~13% and ~135% respectively.
It's also worth noting that some analysts are quite bullish on Micron. UBS, Deutsche and Morgan Stanley hiked their Micron price targets to $20 each, from $17, $16 and $18 respectively. That's not to say that a move higher is a given, but analyst estimates are a good indication of the sentiment, at least among one section of the market.
DRAM Prices Rebound
Micron shares have rallied hard over the last six months, fueled by hopes of a rebound in DRAM and NAND prices. Falling memory chip prices were primarily responsible for Micron's losses in the last two quarters. And while Micron still expects to report a loss this quarter, it appears as if the company will be in much better shape.
Two emerging trends culminate in a favorable narrative for the company going into Q4 earnings. Trends around DRAM pricing, and DRAM demand and supply dynamics. First, DRAM prices have reportedly rebounded to 7-month highs, and given that about 60% of Micron's revenue comes from DRAM sales, this is a big positive. This rebound couldn't have come at a better time for Micron, now that Samsung and SK Hynix have stalled their DRAM production on account of market saturation. So, Micron looks well placed to take advantage of this positive turn of events and absorb the growing demand.
The rebound in DRAM prices is likely a result of coinciding supply shortages and rising demand. In late August, HP CEO Dion Weisler noted supply shortages following HP's results, when he said "some shortages, particularly around LCDs, DRAM and Flash memory." And more recently, Intel hiked its guidance citing a rebound in PC demand, which is also a positive trigger for DRAM demand and prices. All put together, things are shaping up nicely for Micron, but there are risks which investors should take note of.
Micron Goes Into Q4 Earnings As One Of The Most Shorted NASDAQ Stocks
Micron has had a great run over the last 6 months. The stock has gained over 83% since May this year, and ~50% since its previous earnings release at the end of June. All this action seems to have sparked off a lot of skepticism. Based on the latest short interest data as of September 15th (released on 26 Sep), Micron is one of the most shorted NASDAQ stocks right now.
Data shows that short interest in Micron is at its 52 week high, and currently stands at ~77.1 million shares or ~7.5% of Micron's float. This reflects the build up of a bearish sentiment towards Micron, but there's a brighter side to this.
Expect Volatility Post Micron Earnings
Investors should expect to see volatility whether or not Micron beats analyst estimates. Micron's 'days to cover' (to cover short positions) currently stands at just over 3 days, which is also in touching distance of its 52 week high of 3.2 during the preceding fortnight. So, in the event that Micron delivers surprisingly good results, the stock could rise further on the back of short covering, or what is called a short squeeze.
On the other hand, if Micron's results aren't too impressive, short interest could mount further, accentuating the move on the downside. Either way, Micron shares could end up moving sharply.
What's more, Micron's track record shows that volatility can be fairly high on the day following earnings announcements, with huge swings on 2 out of the last 4 occasions.
|Report Date||Quarter||MU Stock 1 Day % Change Post Earnings|
It's worth noting that Micron actually beat earnings estimates in each of these quarters, but missed revenue estimates, which led to the fall. So, keep an eye on how sales numbers shape up versus estimates.
Summing It Up
With DRAM prices rebounding, Micron looks set to deliver a good couple of quarters. That said, Micron's peaking short interest poses a risk in the event that Micron does miss earnings estimates for Q4. Investors should expect volatility to be high following the earnings release. Conservative investors might want to stay out of this stock given the volatility. As it stands, Micron appears to be a high risk/high reward opportunity.
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