A Baird analyst is projecting that Micron Technology (NASDAQ:MU) will not see a rebound in its gross margin until 2020 in the wake of comments by its CFO David Zinsner that the US chipmaker will take a hit in the coming quarters from President Trump’s move to slap tariffs on Chinese goods.
After nine straight quarters of expansion, Micron’s gross margin peaked in the fiscal fourth quarter and so did its earnings per share, which came in at US$3.56 in yesterday's results, beating Wall Street’s forecast of US$3.34, according to Baird’s Tristan Gerra.
“We are modeling gross margin somewhat stabilizing in the second half of 2019 without any rebound likely until 2020,” Gerra wrote in a note to investors.
Gerra also predicts that stock buybacks should “mitigate, but not eliminate” quarter-on-quarter declines in Micron’s earnings per share for fiscal 2019.
Shares of Micron are down 3% at US$44.70 in Friday’s pre-market session, a day after its CFO Zinsner cast a pall over the company’s solid fiscal fourth-quarter performance by saying that US tariffs on Chinese goods would hit Micron’s gross margins in the near term.
Read: Micron Technology shares slip after CFO says Trump's tariffs will hit business and issues disappointing outlook
“Our gross margins will also be impacted in the near term by the announced 10% tariff on US$200bn of imports from China which will go into effect on September 24,” Zinsner said. “We are working to gradually mitigate most of the impact from these tariffs over the next three to four quarters.”
Speaking on the earnings conference call, Zinsner also disappointed investors by forecasting that Micron will see earnings in its next quarter of US$2.88 to US$3.02 per share on revenue of US$7.9bn to US$8.3bn. Wall Street had expected Micron to earn US$3.08 per share on revenue of US$8.45bn.
Shares of Micron have been on a tear over the last year as demand for memory chips has boosted prices, but the chipmaker’s disappointing forecast is fueling concerns that the cycle has peaked.
After digesting Micron’s quarterly performance, however, Baird’s Gerra is sticking to an Outperform rating on the chipmaker, saying its valuation remains attractive for the longer-term investor. “Valuation remains attractive for the longer-term investor as cyclicality of earnings should be muted relative to prior cycles, given Micron’s mix and cost improvements, end-market diversification and new demand drivers,” Gerra wrote. “Outperform-rated.”
Zeroing in on the details, Gerra expects demand for NAND chips and pricing to stay “seasonally weak” through the first half of next year while price declines for DRAM chips could worsen in the first quarter.
But Gerra notes that Micron is “much better positioned” for upcoming boom and bust chip cycles than it has been in the past due to its improved business mix and cost structure.
Gerra is sticking to his US$75 price target on Micron, which was pared back from US$100 earlier this month. He argues that investors should wait for Micron’s gross margin to stabilize before buying into the stock.
Based in Boise, Idaho, Micron is the second-largest supplier of memory chips globally, offering chips that include DRAM, NAND flash and NOR flash.
Micron’s memory chips are used to store information, in comparison to microprocessor chips made by companies like Intel, which provide computing power.