MU Stock: Read This Before You Turn Bearish on Micron Technology, Inc.

MU StockMicron Stock Is Not Over

Micron Technology, Inc. (NASDAQ:MU) stock plunged after the company reported earnings after the bell on Thursday. Before you decide to turn bearish on Micron stock, don’t forget that even after the tumble, it’s still up 14% in the past three months. Going forward, the chipmaker might not be over just yet.

Let me explain…

Over the years, the semi-conductor industry has lost its appeal. One of the reasons is the slowing down of the computer industry. Micron makes dynamic random-access memory (DRAM) and negative AND (NAND) memory chips, which are widely used in computers.

With the PC industry slowing down, investors are worried that Micron’s business could be affected. In particular, a slowing PC industry could impact demand for DRAM and NAND memories, and a weakened demand would put downward pressure on the price of those products.

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Indeed, prices have gone down. In the company’s most recent fiscal quarter, the average selling price of Micron’s DRAM chips declined by 11% year-over-year. (Source: “Micron Technology, Inc., Reports Results for the Third Quarter of Fiscal 2016,” Micron Technology, Inc., June 30, 2016.)

That’s not the whole story, though. While the price of DRAM chips dropped, the quantity sold more than made up for the decline in revenue per chip. In the reporting quarter, Micron’s unit sales of DRAM chips surged 22% year-over-year. As a result, the company’s DRAM revenue actually increased.

The idea is that consumers will always need computing devices, whether they are desktop computers, laptops, tablets, or smartphones and all these devices need memory chips like Micron’s DRAM chips. No matter how the industry shifts, there could always be demand for Micron’s products.

Then there is the booming automotive segment. In the reporting quarter, Micron’s automotive segment generated record revenue due to increasing demand for its DRAM and eMMC storage products. Note that many cars today have complicated instrument clusters, infotainment systems, and advanced driver assistance systems, and those systems require some sort of storage solution.

The growing automotive segment helped drive Micron’s embedded business unit (EBU) sales to $487 million in the quarter. The company’s EBU also achieved an operating margin of 22.0%, a substantial improvement from the 18.9% in the previous quarter.

The company also announced a workforce reduction. Investors don’t like it when companies cut their workforce, but sometimes that’s what companies need to do to keep their costs down, especially when market conditions are tough. Through workforce reduction and other cost-slashing measures, Micron expects to save more than $300 million in its fiscal 2017.

Last but certainly not least, Micron’s financials weren’t really that bad. Obviously, both top and bottom lines deteriorated from the year-ago period, but the market was already expecting that. As a matter of fact, the company’s adjusted loss turned out to be $79.0 million, or $0.08 per share, which was actually narrower than Wall Street’s expectation of $0.09 per share.

At the top line, Micron generated $2.9 billion in revenue, a slight miss from analysts’ expectations of $2.96 billion.

The fact is that if a company’s business is declining, it’s going to be put under the microscope. It doesn’t matter that Micron stock has beaten earnings-per-share (EPS) estimates in the past four quarters, because once revenue started declining, investors walked away. However, this also means that if the company manages to get back on its growth track again, MU stock could see serious upside due to the current oversold environment.

The Bottom Line on Micron Stock

Of course, with such a massive drop on Friday, recovery in MU stock will likely take some time. However, the company still makes solid products. If market conditions improve, Micron stock still has a chance of making a comeback.