It seems that all is not well with the memory chipmaker Micron Technology Inc. MU. The company failed to continue the impressive financial performance recorded in the first half of fiscal 2015 into the second.
In the recently reported third-quarter fiscal 2015 results, both the top line and the bottom line missed the respective Zacks Consensus Estimates and declined significantly year over year.
Micron’s adjusted earnings of 54 cents per share lagged the Zacks Consensus Estimate of 57 cents and decreased 31.6% from the year-ago quarter. Total revenue also decreased 3.2% on a year-over-year basis to $3.853 billion and fell short of the Zacks Consensus Estimate of $3.941 billion.
Management blamed the sluggish demand for personal computers (PCs) and lower Dynamic Random Access Memory (DRAM) selling prices for the disappointing performance. Micron witnessed a 10% sequential decline in DRAM prices while volumes remained flat. DRAMs are memory chips used in PCs.
Furthermore, Micron anticipates the above-mentioned factors to continue to negatively impact its financial performance in the fourth quarter. Therefore, it has issued tepid revenue guidance for the upcoming quarter. The company expects revenues in the range of $3.45 billion to $3.70 billion (mid-point $3.575 billion), lower than the Zacks Consensus Estimate of $4.193 billion.
The dismal results and tepid revenue outlook resulted in a nearly 11.5% plunge in this Zacks Rank #5 (Strong Sell) company’s share price in yesterday’s after-hour trade. The company’s shares have dropped over 31% year-to-date.
Over the past few quarters, this Boise, ID-based chipmaker has been witnessing weak performance at its DRAM products due to the sluggish PC market. It is to be noted that DRAM sales contribute a major portion of the revenues for Micron — the largest manufacturer of DRAM products. Therefore, to reduce its dependency on PC DRAM sales, Micron is expanding its offerings to include the manufacturing of memory chips for smartphones and servers based on NAND and 3D NAND technologies.
We believe that Micron’s warnings are mainly company specific and the broader semiconductor industry remains attractive. In our opinion, semiconductor stocks are likely to have a smooth ride in 2015 with the growing need for technology-based devices by consumers and enterprises alike.
According to the Semiconductor Industry Association (SIA), the worldwide semiconductor industry recorded sales growth of 9.9% in 2014 to $335.8 billion. Also, the report indicated worldwide semiconductor sales growth of 3.4% in 2015, followed by 3.1% improvement in 2016. The industry is experiencing growth primarily on the back of developing end markets and new product offerings, supported by process and yield improvements by semiconductor manufacturers.
Also, expectations of more meaningful growth in the U.S. economy in the coming quarters are a net positive for this economically strong sector. Continued strong adoption of tablets and smartphones, automotive electronics and the emergence of the new category of wearable devices have strengthened the demand for the processing and sensing devices that run them. So, all these factors are driving the semiconductor industry this year.
Obviously, positive momentum has not been on Micron’s side. Nevertheless, the semiconductor market has several promising stocks to choose from. Based on growth, valuation and earnings data, we have picked three such stocks which have a strong potential to yield solid returns over the next 1–3 months.
Ambarella Inc. AMBA
Ambarella develops video compression and image processing semiconductors that are used in digital still cameras, digital camcorders and video-enabled mobile phones. This Zacks Rank #1 (Strong Buy) company has a long-term estimated earnings per share (EPS) growth rate of 22.5%, much higher than the industry average of 13.1%. Moreover, it has a higher return on equity (ROE), return on assets (ROA) and return on capital (ROC) than the respective industry averages.
The stock has witnessed 2 positive estimate revisions over the last 30 days for second-quarter fiscal 2015. Our EPS consensus estimate has gone up from 43 cents for the to-be-reported quarter to 75 cents over the same time period. Additionally, the company has surpassed our earnings estimate in all the last 4 quarters with an average of 35.63%.
Silicon Motion Technology Corp. SIMO
Silicon Motion Technology Corporation designs, develops and markets universally compatible and low-power semiconductor solutions for the multimedia consumer electronics market. This Zacks Rank #1 company has a long-term estimated EPS growth rate of 21%, much higher than the industry average of 13.1%. Moreover, it has a higher ROA and ROC than the respective industry averages.
The stock has witnessed 3 positive estimate revisions over the last 60 days for second-quarter 2015. Our EPS consensus estimate has gone up from 40 cents for the to-be-reported quarter to 44 cents over the same time frame. The company beat our earnings estimate in all the last 4 quarters with an average of 17.60%.
Tessera Technologies Inc. TSRA
Tessera Technologies develops semiconductor packaging technology that meets the demand for miniaturization and increased efficiency of electronic products. This Zacks Rank #2 (Buy) company has a long-term estimated EPS growth rate of 22.5%, much higher than the industry average of 14.6%. Also, it has a higher ROA and ROC than the respective industry averages.
The stock has witnessed 2 positive estimate revisions over the last 60 days for second-quarter 2015. Our EPS consensus estimate has gone up from 37 cents for the to-be-reported quarter to 44 cents over the same time frame. The company surpassed our earnings estimate in all the last 4 quarters with an average of 370.89%.
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