With the supply of DRAM chips tight and demand for NAND chips soaring, memory chip maker Micron Technology (NASDAQ:MU) was able to put up stellar numbers when it reported its second-quarter results on March 23. Revenue exploded higher, rising 17% compared to the first quarter and 58% year over year. The bottom line responded in kind, and Micron expects the third quarter to be even better.
The analyst upgrades came fast and furious following Micron's report, with price targets being boosted as high as $50 per share. Micron stock hasn't traded that high since the dot-com bubble, and only reached a high of around $35 per share during the peak of the last memory boom-bust cycle in late 2014.
Micron stock could certainly go higher if these strong results persist, and the company's guidance suggests that they will for at least another quarter. But the market for memory chips won't stay this good forever. High prices and outsize profits plant the seeds of the next downturn, with timing the only unknown.
A strong quarter with more to come
About 64% of Micron's second-quarter revenue came from DRAM, spread across chips aimed at mobile devices, PCs, servers, and specialty applications like automotive and graphics. Micron's DRAM bit volume only grew by 1% compared to the first quarter, but a 21% rise in average sales price drove revenue higher. DRAM prices declined by 35% in 2016 for Micron, and have declined in four of the past five years, so large increases are not particularly common.
DRAM prices were buoyed by both strong demand and limited industry supply, a potent combination. Micron's DRAM profit was further boosted by its success bringing costs down -- DRAM cost per bit declined by 6% during the quarter. Gross margin for DRAM rose to 44%, up from 28% last quarter, thanks to higher prices and lower costs.
NAND chips, which represent 30% of revenue, also contributed to Micron's second-quarter results. NAND bit volume surged 18% from the first quarter, driven by strong demand. Average sales price dropped 6%, suggesting that supply isn't nearly as tight as it is in the DRAM market, but a 15% drop in cost per bit more than offset that decline. NAND gross margin rose to 31%, up from 23% in the first quarter.
All of this led to GAAP net income of $894 million, up from $180 million during the first quarter and a loss of $97 million during the prior-year period. Non-GAAP EPS came in at $0.90, nearly tripling sequentially and up from just $0.01 during the second quarter of last year. GAAP operating margin was an impressive 22.4%.
Micron expects the third quarter to be even stronger, predicting revenue between $5.2 billion and $5.6 billion, gross margin between 44% and 48%, and non-GAAP EPS between $1.43 and $1.57. The perfect storm of strong demand and low supply in the DRAM market is set to continue, with Micron reaping the rewards.
Everything is going right for Micron, and it's looking like the third quarter is going to set records on multiple fronts. Investors should be cautious, though, when attempting to value the stock. Slapping a multiple on peak earnings for a cyclical company like Micron isn't a good idea. If you did that in 2014, you got burned when memory chip oversupply reared its ugly head.
Is it different this time? Maybe, but I'd bet dollars to donuts that it's not. Every cycle looks different than the last one, but high prices will inevitably encourage more production, erasing the current discrepancy between supply and demand. The good times can keep on rolling for a while, but not indefinitely.