Earnings review of Micron - why the fall following a solid quarter beating performance (FQ2-22)

Micron $MU beat the market forecast in both EPS and revenue from their 29 Mar 2022 earnings.

• EPS 2.14 (actual) vs 1.98 (forecast)
• Revenue 7.79B (actual) vs 7.53B (forecast)

In fact, Micron has been beating the forecast (of both EPS and revenue) for the last 5 previous consecutive quarters.  On the day of earning (29 Mar 2022), the stock opened with a price of $84.30 and closed the trading day at $$79.16.  As of 01 Apr 2022, the stock closed with a price of $76.18, a fall of 9.6% since 29 Mar 2022's opening price.

MU revenue & EPS beat market forecast for results released on 29Mar22

Highlights (extracted from Micron's presentation deck):

• Delivered excellent performance in FQ2 with results above the high end of our guidance; grew revenue and margins sequentially
• SSD products achieved record revenue; auto market revenues also reached an all-time high
• Industry-leading 1-alpha DRAM and 176-layer NAND technology node ramps delivering strong cost reductions
• Portfolio transformation continues to gain momentum. We lead the industry on the DDR5 transition and are growing our mix of NVMe data center SSDs
• On track to deliver record revenue and robust profitability in fiscal 2022

Extract from presentation - great growth and potential in the data center, PC & graphics, Mobile & intelligent edge

Outlook of Micron in relation to industry

Good FCF and capital allocation

Some good highlights:

• From FY-19 to FQ2-22, generated approximately $9 billion of free cash flow*
• $4.7 billion towards repurchasing 94 million shares
• $800 million toward settling convert premiums which reduced diluted share count by 19 million shares
• $5.8 billion returned to shareholders from share repurchases, convert premiums, and dividends
  

Most investors would be thrilled to see the performance up to this juncture.

Guidance for next quarter FQ3-22

Some good reasons to load up on Micron (as per Motley Fool):

1. Double-digit revenue growth for the foreseeable future

2. No cyclical slowdown yet

3. Expanding gross and operating margins

4. Limited exposure to Russia and Ukraine

5. A very attractive valuation - one of the cheapest chip stocks with an attractive forward earning of 8x.

So, what shot down this great performing stock?

Shares are cheap, but some analysts are beginning to worry that the chip industry could cool in 2023

Let us remember that there are a few components that will affect the stock price following the release of the earnings report:

1. EPS actual vs forecast
2. Revenue actual vs forecast
3. Market guidance

In the case of Micron, the stock price fell because of the macro market guidance with concerns that the chip industry could cool in 2023.

Short Financial Analysis of FQ2-22 earnings (GAAP)

(I do not like the way the data is presented where there are no annualized results.  One quarter does not define a trend.)

• The gross margin of 47.2% was a slight improvement from the previous quarter of 46.4%
• Revenue grew slightly from $7,687M (FQ1-22) to $7,786M (FQ2-22), grew by 1.2%
• Operating expenses grew much more from $934M (FQ1-22) to $1,130 (FQ2-22), grew by 20.9% (notable increase in R&D).
• Thus, the resulting net income from last quarter is lesser than the previous despite more revenue 
• Diluted earnings per share (GAAP) fell from $2.04 (FQ1-22) to $2.00 (FQ2-22)
• Assets grew from $61,246M (2 Dec 21) to $63,696M (3 Mar 22) 
• Current assets (CA) stand at a total of $21,502M with $9,116M in cash and equivalent.  This is more than the total Current Liability (CL) of $6,918M.  This is a healthy buffer.
• Good for share buyback of 94 M shares at about $4.7B.
• Cash flow from operating activities grew by $3.1B compared to the same quarter one year ago.
• Part of the exception income was the sale of Lehi, Utah Fab at about $893M.
• We also note a drop in government incentives from $176M to $66M (one year ago)
• There is a concern about proceeds from the issuance of debt of $2B.  With a healthy balance sheet and $9B in cash, is there a need to take on more debts?

I will prefer to deep dive more into the income statement, an annualized one.

What do we do with the stock?

Let us look at the technicals first.  

Do note that I did not do a deep dive into the financial statements (income statement, balance sheet and cash flow statement). 

1D chart for MU as of 2nd Apr 2022

From the 1D chart, we notice the following:

• Stochastic on a downtrend
• MACD though on an uptrend, seems to be going sideways, with a chance of trend reversal, forming a double bottom as the lines linger in the bearish zone of MACD (area under the 0 line in the middle).
• If the downtrend persists over the next few days, a death cross may form when the 50 days moving average (MA) cuts 200 Days MA from above.  This is typically a bearish signal.  This is not yet confirmed and it would take us a few days more to confirm this.

Technical Analysis of $MU using the 1D chart as of 2nd Apr 22

From the technical analysis (1 Day interval), the indicators (technical & moving averages) recommend a "Strong Sell" recommendation for $MU.

In essence, I remain bullish for Micron but I will wait it out especially to avoid the "death cross".  I will put out a longer duration view of the stock and may buy a small position - a BAD (buy after dip) advice.