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MW Micron earnings: Semiconductor shortage leads to heightened expectations

By Wallace Witkowski

Earnings preview: Greater demand for memory chips during COVID-19 pandemic pushed Micron to increase its forecast

Micron Technology Inc. faces a heightened bar of its own making for the rest of the year, as widespread chip shortages push up prices for its core memory chips.

Micron $(MU)$ is scheduled to report fiscal second-quarter earnings results after the close of markets Wednesday. The Boise, Idaho-based chip maker considerably raised its forecast for the second quarter earlier this month, setting up expectations for the rest of the year.

The big gain in sales is largely the result of the global semiconductor shortage that developed amid heightened demand during the COVID-19 pandemic. Micron could see revenue surge by more than $1 billion from its core memory products, and analysts expect those types of gains to continue throughout 2021.

Read: Worldwide chip shortage expected to last into next year, and that's good news for semiconductor stocks

Micron specializes in DRAM and NAND memory chips. DRAM, or dynamic random access memory, is the type of memory commonly used in PCs and servers, while NAND chips are the flash memory chips used in smaller devices like smartphones and USB drives.

Analysts on average expect DRAM sales of $4.3 billion, up from $3.08 billion in the year-ago period, and NAND sales of $1.6 billion, up from last year's $1.51 billion, according to FactSet.

Mizuho analyst Vijay Rakesh, who has a buy rating on Micron and a $100 price target, said he sees the the second half of 2021 as an exceptional cycle for memory-chip makers as "growth shows more potential upside after recovering frompricing and data center demand headwinds in 2H20/1H21."

Rakesh said that DRAM pricing for PCs are expected to rise 19% from a year ago, when prices dropped 17% year-over-year. NAND prices are expected to remain stable and possibly recover a bit, with 5G-device launches as a tailwind.

Ahead of the report, the company said it was dropping development of 3D XPoint technology in order to focus on compute-express link chips for data centers.

What to expect

Earnings: Micron on average is expected to post adjusted earnings of 95 cents a share, up sharply from 66 cents a share expected at the beginning of the quarter, based on 29 analysts surveyed by FactSet. Micron forecast earnings of 93 cents to 98 cents a share at the beginning of March, up from its previous forecast of 68 cents to 72 cents a share . Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 98 cents a share.

Revenue: Wall Street expects revenue of $6.19 billion from Micron, according to 28 analysts polled by FactSet. That's up from the $5.54 billion forecast at the beginning of the quarter. Micron predicted revenue of $6.2 billion to $6.25 billion at the beginning of March, up from its previous forecast of $5.6 billion to $6 billion. Estimize expects revenue of $6.26 billion.

Stock movement: Over Micron's fiscal second quarter, the stock rose nearly 21%, compared with a 4.3% increase on the PHLX Semiconductor Index over the same period, a 1.9% rise by the S&P 500 index and a 2.8% gain by the Nasdaq Composite Index . Micron shares closed at $94.60 on March 1, their highest closing price in more than 20 years.

What analysts are saying

Evercore ISI analyst C.J. Muse, who has an outperform rating and a $135 price target, said in a note related to Micron's hiked forecast that broader chip shortages will keep demand high.

"Longer-term, with management calling out undersupply for DRAM through all of CY21 (and even hinting this could continue into CY22) and falling NAND inventories leading to a higher likelihood of a turnaround there, we see a strong roadmap for estimates to continue moving higher through-out CY21," Muse said.

UBS analyst Timothy Arcuri, who has a buy rating, said a recent discussion with a former Micron executive indicated that the company's lesser exposure to NAND compared with competitors gave it an advantage while it stands to benefit from continued high DRAM demand.

"DRAM consolidation has played out and Samsung, Hynix & MU are behaving rationally, even as demand remains robust to the point where it is plausible that hyperscalers may consider pre-paying for supply," Arcuri said.

Of the 34 analysts who cover Micron, 28 have buy or overweight ratings, and six have hold ratings, with an average price target of $114.86.