Micron Technology's ( MU -1.52% ) fourth-quarter results did not disappoint. Revenue grew 38% year over year to $8.44 billion, buoyed by strong demand and high prices for DRAM chips, and non-GAAP earnings per share jumped nearly 80% to $3.56. Both handily beat analyst estimates.
But it wasn't enough to quell concerns about an impending downturn in the memory chip markets. Micron's lackluster guidance led shares to open lower on Friday, adding to a painful decline that has destroyed roughly 30% of the stock's value over the past few months.
Falling short of expectations
Micron expects to produce revenue between $7.9 billion and $8.3 billion in its fiscal first quarter, along with a non-GAAP gross margin between 57% and 60% and non-GAAP earnings per share of $2.95, plus or minus $0.07.
Analysts were expecting revenue guidance of $8.4 billion and EPS guidance of $3.06. Micron's guidance for both metrics came up short. Gross margin is also set to decline from the 61.4% Micron reported for the fourth quarter.
There are a few things happening here. First, NAND prices have been dropping. During the fourth quarter, Micron's average selling price for NAND chips tumbled by more than 20% year over year. The company was able to boost its NAND gross margin by cutting manufacturing costs and shifting its product mix toward higher-value-added solutions, but the downturn in NAND prices could become more severe in fiscal 2019.
Tariffs are also expected to negatively affect Micron's results. CFO David Zinsner said during the earnings call that the recently announced 10% tariff on $200 billion of Chinese imports, which begins on Sept. 24 and escalates to 25% at the end of the year, will knock down the company's gross margins. The company expects to be able to mitigate most of the impact over the next few quarters, but there's only so much it can do.
Micron also provided some warnings about its DRAM business, which has been its growth engine during the current memory chip cycle. A shortage of Intel CPUs has the potential to reduce sales of PCs, which would in turn reduce demand for DRAM chips. "I don't know exactly how long the CPU shortage will last," Zinsner said during the earnings call. CEO Sanjay Mehrotra added: "I will just add that with the CPU shortages, we expect it to be short-term. It's possible that it goes beyond Q1 as well."
On top of the CPU shortages, Micron disclosed that some of its customers are reducing their DRAM inventories. This inventory correction is modest and limited right now, but it could be a harbinger of weaker DRAM demand in 2019.
"This is how memory downturns begin"
Add it all up, and it's clear why analysts have become increasingly negative over the past couple of months. Micron's first-quarter guidance has done nothing to improve that view.
Morgan Stanley reiterated its "equal weight" rating on Friday, equivalent to a "hold" rating, with analyst Joseph Moore concerned that the Intel shortage issue could become more severe going forward. "This is how memory downturns begin," he said in a note to clients, as reported by CNBC.
Micron's management believes that any future downturn will be muted compared to the downturns of the past, thanks in part to a more diversified revenue base not overly dependent on PCs or mobile devices. That may turn out to be the case, but it doesn't mean that Micron's profits can't tumble from here. With signs of trouble in the memory chip markets, investors should brace themselves for a rough ride in the year ahead.