Credit Suisse said that Micron is one of the best positioned stocks in the semi space right now. Meanwhile, J.P. Morgan said, "MU is benefitting from a balanced supply/demandenvironment for both NAND and DRAM. However, continued pricing stability and shortages will have an impact on customers and we believe the industry will have to add capacity in [calendar year] 2014."
Deutsche Bank noted the macro risks to the business this morning: "Risks to the upside and downside revolve primarily around the supply and demand for memory products and the impact on ASPs. Industry supply growth is driven by access to capital and the timing of new technology nodes. Demand for memory products is largely a function of the macro economy and unit growth of PCs, MP3 players, digital cameras, and wireless handsets. The majority of MU's memory revenue is derived from the sale of products for PCs, handsets, and MP3 players."
So with analysts making rather bullish comments on the stock following a pretty solid earnings beat, accompanied by 7 price target raises this morning, why is the stock down more than 4 percent?
Semiconductor Weakness
The benchmark PHLX Semiconductor Index declined nearly 3 percent Thursday as the economically sensitive sector fell due to the numerous macro headwinds plaguing the market today. However, Micron fell 4.65 percent, significantly more than the sector and the broad market with the S&P 500 declining 2.2 percent.
Micron has a beta of 1.3, meaning that with the S&P 500 down 2.2 percent, using the capital asset pricing model (CAPM), the stock should be down 3.27 percent on average. Therefore, there is more going on here that is stock specific. But what is it?
Forward Guidance Weakness
In the conference call after the close Wednesday, the company noted that it sees a significant increase in costs in the fourth quarter. Micron sees SG&A costs rising about 10 percent while while R&D expense will only grow 4 percent. Interest expense is also expected to rise and the company will not get a favorable tax boost as it did in the third quarter. Further, and perhaps most importantly to the stock action today, CapEx is expected to rise a whopping 70 percent quarter over quarter.
With costs rising, the market is most likely pricing in margin compression in the future. Couple this margin compression with the recent macro fears, the decline in the stock appears warranted. As the global economy slows, pricing power declines for semiconductor companies as inventories build, meaning that margins will be pressured from both the top and bottom lines.
Micron is also stuck in a precarious situation where it is locked into a long-term contract with Intel INTC to sell chips to Intel at or very near cost. Therefore, as these sales become a larger part of sales if total demand in the market falls, the average margin will fall further.
