The Market Likes Micron’s Earnings; What Does Smart Money Think?

Einhorn increased his position because he still likes the long term fundamentals of the company. From Einhorn’s second quarter letter:

“It’s a cyclical business and, regrettably, we missed the turn of the cycle. Long production lead times make it difficult to match supply with demand, and when demand falls short (as it has recently), shortages can turn into surpluses. Prices (and profits) fell, and MU disappointed. MU also had manufacturing problems that will impact earnings for the next couple of quarters. With only three remaining players, the industry is behaving more rationally. Manufacturers are redirecting capacity away from computer DRAM to other segments, and we believe that the excess computer DRAM inventory created earlier this year is now being absorbed. Our assessment is that MU shares have fallen too far. Peak quarterly earnings last year were $1.04 and we expect the cyclical trough to be around $0.40 in the August quarter. At $18.84, the company trades at less than 12x annualized trough earnings and less than 5x prior peak earnings. We expect future cycles will have higher peaks and higher troughs, as the technology story for both DRAM and NAND (including 3D memory) is bright for the next several years. Our long-term outlook is that sometime in the next few years, MU (currently valued at $20 billion with $3.7 billion of trailing net income) will be worth more than NFLX (currently valued at $40 billion with $240 million of trailing net income). It’s a contrarian view, but we don’t think the movie is over.”

Chinese firm Tsinghua Unigroup’s $21 per share offer for Micron Technology has not helped the company’s stock. The shares are down 53% year-to-date as investors worry about falling DRAM average selling prices and dismiss Tsinghua Unigroup’s bid as untenable given the national security concerns. While the short term is painful, we’re bullish on Micron in the long term. The company occupies an enviable position as the leading memory producer and its earnings will grow after the cycle troughs.

Disclosure: None