Paul Meeks Sets $1,600 MU Price Target: Will Earnings Back AI Growth Picture?

SPEAKER_1 (0:01)

We're back on Morning Trade Live and checking out the one year chart for Micron, which will report its latest quarterly results after the close today. Shares up more than 500% year over year. What a run it's had. We came off the highs of the summer as we've seen here, but we've been edging closely back, obviously as we've seen at rotation, back into some of the semiconductor chips. We had a good week in recent sessions, I should say a good session in recent weeks back of what we heard from Muse. But let's go inside out on Micron as it's got its upcoming earnings tonight. Joining us now is Paul Meeks, Head of Technology Research at Freedom Capital Markets. Paul, always nice of you to join us. What has Micron got to say tonight?

Paul Meeks (0:45)

So Micron undoubtedly will have great numbers reported and guided to. The question is, with all investors, is this company used to be a cyclical company? And so on the downswing of the cycle, they would go into very deep losses.

Now, I believe that going forward, as they increase the proportion of their total revenue mix with these long-term take or pay contracts that have price floors, that at the next downturn, there always will be one, that the company will stay profitable and probably much more profitable than people expect. And so, it's just going to be a transition, that maybe won't happen tonight, but we'll see it over time develop, where people say, oh, this is a growth company, and not a cyclical company. Because right now, no matter what they report, the stock has been trading at a 6PE, when the S&P 500 trades at about 19 times. Just doesn't make sense.

SPEAKER_1 (1:49)

Yeah, there's a lot of head-scratching, and I hear what you're saying. I mean, these companies have certainly been proving how non-cyclical this business is becoming, just because of course, the, I guess, visibility they have with some of those contracts, at least, and some of the pricing power for now.

What metrics are you going to be looking out for? Because what I'm seeing, what I'm hearing from the analysts, I was speaking to Daniel Newman about this yesterday over at Futurum, is that margins are going to be really scrutinized. And there's an expectation that we could see something north of 86%.

Paul Meeks (2:24)

Yeah, it's incredible, and we might even have higher gross margin over time. But again, the key will be, hey, that's great, but is this peak Micron? We'll see, because it seems to me that no one will be surprised about the robust results and the outlook. They'll just say, oh, okay, is the peak this quarter? Is it next quarter? Is it this fiscal year? Is it next fiscal year?

And when folks see that the business is going to be more and more skewed to these long-term take or pay contracts, then the stock is the valuation lift. Probably not until that last quarter, the company announced that in its outlook, about 20 percent of its revenues were these deals that I was talking about. What I'm looking for tonight is guidance to a much higher percentage of those deals, because I think that would be the most important result in my book.

SPEAKER_1 (3:19)

Okay. Just unpack that a little bit more for us. As far as some of the specifics you're going to be looking out for when it comes to the metrics and some of the updates around the language with respect to some of the deals and the outlook.

Paul Meeks (3:33)

Yeah. Of course, like every analyst that covers the name, and I've been covering this company since it went public in the 1980s. I'm looking for the revenue, the gross margin, the capital expenditures, the profitability past and forward. But again, I think the most important thing is, and remember, the benchmark was last quarter, they said 20 percent of their revenue in such deals for the long-term. I'm hoping it's a much higher percentage, not only in the quarter, but also what they talk about in the future that may be excused to much higher than 50 percent of total revenue, Sam.

That would be, in my book, the most important disclosure.

SPEAKER_1 (4:17)

All right, something to watch. Yeah, I know somebody who was working for Micron back in the 80s in Boise and kicking themselves now over, not holding on to those shares. I'm just wondering then, what is this going to mean for the stock come tomorrow, as far as the reaction in the broader chip space then?

Paul Meeks (4:34)

Well, it's always very difficult. Now, last quarter, when they positively surprised, the stock did lift, but in prior quarters, they would have upside numbers, and sometimes hugely upside numbers, and the stock would actually reverse.