Investors Had a Tepid Reaction to Micron's Latest Earnings Report. An Overlooked Headwind May Explain Why.
Key Points
Micron stock rose modestly following a phenomenal earnings report.
Analyst estimates in fiscal 2028 point to a dramatic slowdown.
Investors may fear a drop in profits that renders Micron's low P/E ratio meaningless.
Investors may be confused about what to make of Micron's (NASDAQ: MU) earnings report for the fourth quarter of fiscal 2026 (ended Sept. 3). The company exceeded analyst expectations with both revenue and earnings, delivering revenue growth well into the triple digits.
Despite that report, investors appeared to shrug following the news, and the chip stock rose only modestly in the subsequent trading session. That reaction probably reminds investors of Micron's often-overlooked headwind, which may affect whether they bid Micron's stock higher.
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Micron's headwind
No matter how well Micron's financials perform, investors live under the specter of the industry cycle, and its possible effects have begun to appear in analyst estimates.
Admittedly, based on Micron's financials, it looks about as far away from a "downturn" as a stock can get. Its revenue more than quadrupled on a quarterly basis, and for fiscal 2026, the $133 billion in revenue reported is far above the $37 billion reported in fiscal 2025.
Also, the rise in costs and expenses was relatively modest, resulting in a net income of $85 billion. That is about 10 times the $8.5 billion in profit from the prior fiscal year.
Unfortunately, the memory chips it sells are commoditized. For now, demand is far ahead of supply, meaning it commands tremendous pricing power.
Still, seasoned chip stock investors know these trends eventually reverse. This means when supply finally exceeds demand, Micron will have to cut production and slash prices just to clear its inventory.
Analyst estimates appear to offer a preview. For now, analysts estimate a 107% increase in revenue in fiscal 2027. Nonetheless, for fiscal 2028, they forecast growth will fall to less than 8%. That could mean the cyclical downturn will begin in the foreseeable future, meaning investors may have to brace for a sell-off sooner rather than later.
This fear has a profound effect on its valuation. Micron trades at a P/E ratio of just 15 and a forward earnings multiple of just above 6. That makes Micron stock look wildly cheap. Still, a 90% drop in profits (a conceivable scenario given past industry cycles) would take that earnings multiple to 150 and the forward P/E ratio to almost 60 at current prices, highlighting the danger of these reversals.
Moving forward with Micron stock
Considering the historical effects of industry cycles, Micron stock is barely reacting to an exceptionally strong report, and analyst estimates suggest it could bode poorly for the stock.
Considering triple-digit revenue growth and a tenfold increase in profits, Micron has delivered hugely positive results.
However, longtime chip stock investors know the industry's cycles, and the single-digit revenue growth forecast for fiscal 2028 could signal the beginning of a downturn. That appears to render Micron's deceptively low P/E ratio meaningless and could indicate investors need to turn cautious on the stock.
That may be what led to a tepid reaction to the earnings report, and investors should take note.
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.