Thursday night, Micron Technology (MU +5.08%) reported results for the second quarter of fiscal 2018. The memory chip giant more than tripled its bottom-line earnings on a 58% revenue surge, exceeding Wall Street's targets on both the top and bottom lines. More importantly, Micron provided clear signs that the good times should continue to roll in the long run.
Micron's second quarter by the numbers
|
Metric |
Q2 2018 |
Q2 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$7.35 billion |
$4.65 billion |
58% |
|
Net income attributable to Micron |
$3.31 billion |
$894 million |
270% |
|
GAAP earnings per diluted share |
$2.67 |
$0.77 |
247% |
Data source: Micron Technology.
Many companies are adding substantial one-time tax items to their results these days, to account for December's shakeup of the U.S. tax code. In Micron's case, the one-time charges and benefits triggered by that event largely balanced each other out. Micron's corporate tax rate will fall from 35% in 2017 to 21% for the 2019 fiscal year, with the 2018 period splitting the difference at roughly 25.7%. That's an effect of Micron's fiscal years not matching the calendar year.
Image source: Micron Technology.
How to read Micron's key figures
Above all else, my takeaway from this report is that Micron's business environment is as healthy as ever, with several sustainable drivers of future memory chip demand. Most of the numbers required to reach this conclusion weren't part of the earnings report itself but were presented on the earnings call instead.
Smartphones are shipping with larger DRAM quantities than ever, and it's not a small jump. The last generation of high-end Android phones topped out at 4 gigabytes of operating memory. Now, some models are sporting 6 GB -- somewhere between 50% and double the memory reserves found in 2017's flagships. Since DRAM chips accounted for 71% of Micron's second-quarter sales, and a large portion of that revenue stream came from mobile memory chips, this trend is great for Micron's top line.
The same thing is happening to long-term storage in modern smartphones, where most high-end phones used to come with at least 32 GB of NAND-based storage and 64 GB as a pricier option. In this generation, the base level is doubling to 64 GB, making room for even larger luxury options that are sure to become next generation's standard storage allowance. On top of this, very large solid-state drives are driving NAND demand in the corporate computing industry.
NAND chips carry lower gross margins than DRAM -- 47% versus 66% in Micron's second quarter -- but it's all good because both product categories are highly profitable.
The upshot of Micron's results
Having sustainable long-term growth trends behind both product categories ensures stable unit prices -- as long as the remaining handful of memory chip suppliers continue to grow their production capacity at a reasonable speed to avoid another price war.
Once upon a time, it made sense to flood the memory market every now and then, shaking out the weak hands. The survivors snapped up the remains of their defeated competitors at bargain-basement bankruptcy discounts. Chip prices would stabilize again a few quarters later, allowing the stable of even bigger winners to collect some fresh cash to finance the next round of deal-hunting.
Several rounds of this approach led Micron and its last two serious rivals -- SK Hynix (NASDAQOTH: HXSCL) and Samsung (NASDAQOTH: SSNLF) -- to dominate the memory market and pull all the levers to control the supply and-demand balance. It is in the best interest of all three key suppliers to maintain healthy unit prices these days, and this newfound pricing stability just might be here to stay for the long haul.
As a Micron shareholder, I'm a happy camper. If this mature stability really is the new "normal" for the global memory chip industry, then Micron's stock is severely undervalued at 8.5 times trailing earnings and 6 times forward estimates.
