Will Micron Technology Pop Or Plunge After Earnings?

Jun.23.14 | About: Micron Technology (MU)

Summary

Micron Technology is expected to report solid growth in the second quarter.

Micron's outlook should remain strong as the company is benefiting from positive industry trends.

Micron's cheap valuation and the fact that it looks set to profit from the Apple iPhone 6 could take the stock higher.

Shares of Apple (NASDAQ:AAPL) supplier Micron Technology (NASDAQ:MU) have appreciated at a terrific pace this year, gaining close to 50%. However, the stock's direction depends on how its third-quarter earnings report, which is expected to be released after market close on June 23, turns out. Let's take a look at what's expected of Micron and whether or not the company will be able to deliver an outstanding outlook,

What's expected

Analysts, according to Yahoo! Finance, expect Micron to post revenue of $3.89 billion, a massive jump of 67.70% from the year-ago period. On the other hand, its earnings are expected to jump to $0.70 per share this year from just $0.04 per share in the year-ago period. The estimates might look quite aggressive, but the fact is that Micron is expected to report such solid growth due to its Elpida acquisition, which was closed last year in July.

Also, posting such solid growth won't be a first for Micron, as it had done even better in the second quarter reported in April. Micron had reported impressive results in the post-holiday quarter that usually generates less sales as a result of seasonality. Its revenue zoomed 98% year-over-year to $4.11 billion, helped by strength in average selling prices for DRAM and NAND flash memory.

Also, its non-GAAP net income jumped 12.3% to $989 million, or $0.85 per share, in the second quarter, as against $881 million, or $0.77 per share, in the year-ago quarter. In comparison, analysts were expecting EPS of $0.76 per share on revenue of $3.99 billion. Hence, Micron beat estimates convincingly and it should be able to sustain its run going forward due to some simple reasons.

Gauging the outlook

Micron's outlook should be strong as the company is switching production lines to make NAND chips used in smartphones and tablets from making DRAM chips for personal computers. It expects to benefit from the NAND market that is supposed to grow at CAGR of 30%-40% for the next five years.

Micron remains bullish on NAND flash. Its NAND process technology has now stabilized, and this will drive its growth going forward. So, the company is ramping yields of its 20-nanometer technology, along with the 16-nanometer technology. In addition, Micron is planning to release 3D NAND samples in the market in the second half of 2014.

The 3D NAND flash memory market is expected to grow at a terrific pace going forward. According to analysts, this market might grow at a CAGR of 180.7% over the period 2013-2018. Hence, Micron is making a smart move by tapping this market.

Apple to drive mobile growth

In addition, the company is finding good traction in mobile. Micron is experiencing solid demand for mobile DRAM and NAND on the back of strong growth in smartphones and tablets. The company also has an important customer in the form of Apple, courtesy the Elpida acquisition.

Elpida supplies flash memory for the iPhone, so the acquisition of the company by Micron has brought a lucrative account into its fold. This year, Apple is expected to bring out a revolutionary iPhone 6 with a bigger screen size, which will bring more users into its ecosystem. According to AppleInsider:

"Marshall is one of a large number of investors who are widely expecting Apple to introduce a larger iPhone later this year. Just last week, Andy Hargreaves of Pacific Crest predicted that Apple's next handset will feature a 4.7-inch display and a $299 starting price tag.

Currently, Apple's iPhone 5s and iPhone 5c come with screen sizes of 4 inches. If Apple were to increase the display size on its next-generation handset, sometimes referred to as an "iPhone 6," it would be the second time that the company has done so, originally starting with a 3.5-inch display on the first-generation iPhone through the iPhone 4S."

A larger iPhone should help Apple gain market share from rivals such as Samsung, which have been offering bigger screens for quite some time. Apple believes that a larger iPhone will sell like hot cakes, and this is the reason why the company is targeting to sell 80 million units of the device this year. Hence, Micron should see a spurt in orders from Apple, which is another reason why its outlook should look strong.

Conclusion

At a trailing P/E of less than 13 and a forward P/E of below 10, Micron looks like a solid investment considering its rapid growth rate. The company's earnings should come in strong, while its outlook also looks positive due to end-market developments. So, investors should remain invested in Micron going into earnings.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.