Micron (MU) reported earnings after the close on Wednesday. The stock rocketed upwards by nearly 10% on the following session on Thursday. On first impressions the quarter was decent, as the company did deliver a modest beat on both sales and dil. EPS estimates. The analyst consensus expected revenue of $5.82 Billion and non-GAAP EPS of $1.67. The company reported revenue of $5.84 billion and non-GAAP EPS of $1.71, which represented a beat of $200 million on sales and $.04 dil. EPS beat.
The stock surged on mostly constructive commentary tied to DRAM pricing trends, which has affected the company’s sales significantly in the prior year, as revenue declined by 20.5% year-on-year in Q2 2019. The reasoning for this was due to DRAM revenue, which represents 64% of Micron’s revenue. The DRAM average selling price fell in the low-20% range quarter-over-quarter, and shipment quantities also declined in the low double-digits according to management on the call.
While, the issues expressed in terms of pricing were expressed on the call, the company’s CEO and CFO believed that supply-demand market imbalance was the main reason for pricing declines, and they were going to reduce supply of memory to reflect the weakness in the market. Micron’s management believes that a 5% reduction in production of wafer starts will help with managing the supply imbalance in the DRAM market.
Despite the concerns with the revenue declines, much of this was already priced into the stock, which fell from its 52-week high of $64.66 per share. Assuming there’s a recovery in demand in the 2nd Half of 2019, there could be a solid recovery narrative here, which may explain the willingness of bulls to pile back into the stock on the following session.
The company had solid industry outlook with shipments expected to increase in the next quarter. 2019-bit demand growth will be in the low-to-mid teens: industry bit supply growth to reach mid-to-high teens, for DRAM.
This has been a sore spot in Micron’s business for the past couple several quarters, so a recovery here would alleviate the stock price, as the valuation will recover on improving demand for DRAM.
Also, NAND is expected to remain a growth business (storage). The company expects bit demand growth to accelerate to the high 30 percentage point range, which is good as NAND units grew in the high single digits in the current quarter.
Assuming the business reverts from its cyclical market slump, investors are expecting momentum in terms of DRAM and NAND volumes though pricing is difficult to predict it seems like a recovery would also result in more stable pricing.
The management team offered Q3’19 guidance which partially reflected some recovery in business fundamentals:
With that in mind, our non-GAAP guidance for the fiscal third quarter is as follows: We expect revenue to be in the range of $4.80 billion, plus or minus $200 million; gross margin to be in the range of 37% to 40%; and operating expenses at approximately $785 million, plus or minus $25 million. Based on a share count of approximately 1.14 billion fully diluted shares, we expect EPS to be $0.85, plus or minus $0.10.
The outlook was a bit soft when compared to analyst consensus estimates, with revenue expectations of $5.33 Billion and dil. EPS estimates of $1.23 for the next quarter, which compared to outlook of $5B and dil. EPS of $0.95 to $0.85.
Perhaps, management reduced their outlook in anticipation of what could be a somewhat solid recovery in DRAM and NAND. This might position the company for a solid quarter, or we could be waiting for a while longer. In either case, most investors are anticipating a recovery in the stock price, and given the cyclical nature of the semiconductor industry, the company could soon be outperforming its own financial outlook assuming industry trends strengthen in the second half of 2019.
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