What to Make of Micron's Dreary Outlook

The firm also expects to build inventory levels instead of flooding the market with product, in order to take advantage of the second-half calendar 2019 recovery that CEO Sanjay Mehrotra has prognosticated. Historically, memory chipmakers haven’t taken such pre-emptive actions this early in the cycle, especially when profitability is still excellent (42% net profit margin during the quarter). We think this validates our overall semiconductor thesis that future cycles will feature less severe peaks and troughs thanks to more rational behavior and better diversified end markets. Micron shares fell 9% during after-hours trading and are now at a discount to our unchanged $40 fair value estimate. Although we now model fiscal 2019 being down considerably, we expect a solid recovery thereafter thanks to the proactive efforts of the key memory participants. Nevertheless, we’d wait for a wider margin of safety to invest, given our very high uncertainty rating for no-moat Micron.

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