This is why it’s so hard to sell this market in spite of stunningly high valuations.
“This” is the 14.7% gain on September 26 in shares of Micron Technology after the company announced results for the fiscal fourth quarter and forecasts for fiscal first quarter revenue and earnings.
Results from Micron’s fiscal fourth quarter easily beat estimates. Revenue increased 93% to $7.75 billion in the period, which ended August 29. Excluding one-time items, earnings were $1.18 per share against analyst estimates of $1.12 a share.
Fiscal first-quarter revenue will be about $8.7 billion, the company said. That compares with an average analyst estimate of $8.32 billion. Profit will be about $1.74 a share, minus one-time items, versus a Wall Street consensus projection of $1.52.
The good times for Micron are a result of the boom in AI spending. Orders for high-bandwidth memory, used to develop AI systems by providing more rapid access to data for machine learning, have produced strong new revenue for memory chip makers. Demand has outpaced supply, letting Micron boost prices and secure long-term guaranteed contracts. It’s already sold out of the product for 2024 and 2025, the company said Wednesday.
The chipmaker also is emerging from a slowdown in demand for personal computers and smartphones, two of the biggest markets for memory. Device shipments are now growing again, Micron said. Those devices will increasingly feature AI functionality that requires more memory chips.
The company is one of only a handful of memory-chip makers that have survived the industry’s recent brutal boom-and-bust cycles. Micron competes with South Korea’s Samsung Electronics and SK Hynix.
Given the news, the huge gain today isn’t surprising. But let’s be clear: this isn’t a cheap stock. Micron trades at a price-to-earnings ratio of 157. At today’s close of $109.88, the stock isn’t at the top of its 52-week range of $64-$158. But after the gain today, Morningstar calculates that the stock is fairly valued.
In other words, if you buy now, you’re betting that the stock will move higher to trade at a premium to fair value.
Which is a situation similar to that of the market as a whole. Yesterday, before Wall Street started to raise its price targets, the consensus saw the Standard & Poor’s 500 index dropping about 4% by the end of the year from its most recent all-time high.
I think you can make a case that momentum in the technology sector and hopes for at least another 75 basis points in interest rate cuts from the Fed can keep this rally going into early January. Third and fourth quarter earnings growth looks very positive for the companies in the third and fourth quarters, a period that’s traditionally strong for technology revenue and earnings. The big question, though, is what happens after tech companies announce superlative earnings for the fourth quarter beginning in early January. Will guidance for the first and second quarters of 2025 be strong enough to provide a rising tide to lift all boats?
At this point, as the positive earnings news from Micron and the big jump in share price indicates, I think it’s worth sticking with this rally into December or early January. After that I’d look to hedge my bets. Which is a polite way of saying that I’d look to at last selective selling after the turn of the year.
