Micron Earnings May Give Clues on Holiday Shopping Demand

Thursday’s quarterly earnings report from Micron Technology (MU) will provide some clues about consumer demand ahead of the all-important holiday shopping season.  Micron shocked the market last month by warning that rapidly slipping demand for computers would curb sales of its memory chips.  As a result, Micron stock has fallen more than -45% this year and posted a 1-3/4 year low last Friday.

The market will be attentive to Micron’s forecast for future growth, especially after news from Apple (AAPL) today signaled the outlook may have worsened. Bloomberg reported today that Apple would back off from its plans to boost iPhone production this year after an anticipated surge in demand failed to materialize. 

Over the past three months, analysts have cut Micron’s sales estimates for this year by 6.9% and earnings estimates by 12%.  Analysts also expect revenue for the fourth quarter ended August 31 to fall by 18%, which would be the first decline in 10 quarters.  Micron’s woes are likely to have ripple effects throughout the chip-making industry.  Comments on further cuts in sales could affect makers of the equipment used to produce semiconductors, such as Applied Materials (AMAT) and Lam Research (LRCX).

With fears of a recession looming, chip stocks have seen a deeper selloff than the rest of the technology sector.  For example, the Philadelphia Semiconductor Index ($SOX) posted a fresh low for the year Monday and is down -41% from its record high close in December and is down nearly -40% this year. In contrast, the Nasdaq 100 Stock Index ($IUXX) (QQQ) is only down -31% this year.

This year’s plunge in chip stocks has reduced valuations to near-bargain levels.  Micron is selling for 11 times estimated earnings for the next year and 1.1 times book value.  However, with interest rates expected to continue climbing, profit forecasts for the company may still be too high.  Synovus Trust said, “Micron is definitely undervalued from a historical perspective, but it can still go lower.” 

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