Micron Has Everything to Prove on Tuesday

Memory chip manufacturer Micron Technology (MU 3.06%) is no longer a Wall Street darling. The stock is down more than 40% from its 52-week high, driven by worries about a downturn in the memory chip markets. Micron will report its fiscal first-quarter results after the close on Tuesday; the company will need to prove that its results can hold up better than in the brutal cycles of the past.

What happened last time

Micron managed to beat analyst estimates for both revenue and earnings when it reported its fiscal fourth-quarter results in September. Strong demand and pricing for DRAM chips continued to buoy the top and bottom lines.

Data source: Micron Technology. YOY = year over year.

On a year-over-year basis, DRAM sales volume increased by nearly 20%, and DRAM per-bit average selling price jumped by more than 20%. NAND didn't fare quite as well, with average selling price plunging around 25%, although NAND sales volume was up nearly 60%.

Along with those strong results came the first indication from Micron that the party is coming to an end. Micron sees first-quarter revenue between $7.9 billion and $8.3 billion, down from the fourth quarter but up from the prior-year period, and non-GAAP EPS between $2.87 and $3.02. Both ranges were below analyst expectations at the time. Micron is also expecting its gross margin to decline from the fourth quarter.

On top of the lackluster guidance, Micron announced that it would no longer disclose gross margin figures for its DRAM and NAND categories. This comes less than a year after the company stopped divulging how per-bit costs changed. The timing of this latest disclosure change, coming just as the numbers are starting to move in the wrong direction, is no coincidence. It's fair-weather transparency at its finest.

Image source: Micron.

What analysts are expecting

Analysts have lowered their first-quarter expectations since Micron doled out its guidance. Micron CEO Sanjay Mehrotra updated that guidance during a conference in November, saying that revenue is tracking toward the low end of the range, while earnings per share is tracking toward the high end.

Data source: Yahoo! Finance. 

Analysts in general have been getting increasingly negative on Micron over the past month:

• Nov. 20: Baird downgraded Micron all the way from outperform to underperform, cutting its price target by more than 50% to $32 per share. Deterioration in DRAM and NAND pricing drove the downgrade.
• Also Nov. 20: Cleveland Research called Micron the most aggressive DRAM vendor in October and November amid an expected 8% to 10% sequential decline in DRAM prices in the fourth quarter. That's a recipe for slumping margins.
• Nov. 27: UBS reduces its Micron price target from $52 to $41 per share, citing a faster and steeper decline in DRAM pricing than previously expected.
• Nov. 29: Both Mizuho Securities and RBS Capital kept buy ratings on Micron stock but cut their respective price targets by $5-$6 per share. Mizuho now has a $54 price target, while RBC has a $65 price target.
• Dec. 10: Citi keeps a neutral rating on Micron stock and maintains a $40 price target but lowers its fiscal 2019 revenue and earnings estimates due to overcapacity and inventory build. Citi sees NAND pricing plunging by 45% in 2019, and DRAM pricing tumbling by 30%.

The big question

Micron stock looks incredibly cheap based on current earnings, but those earnings won't hold up if both NAND and DRAM prices crash next year. How bad will the downturn be? That's a question that can't be answered until the bottom is reached.

Micron's outlook for its second fiscal quarter, along with commentary from management, will give investors a better idea of what the company is seeing in the memory chip markets. The good news is that Micron's balance sheet is in great shape. That should help the company weather even a severe downturn.

The bad news is that it looks increasingly unlikely that Micron will be able to escape the cyclical nature of its industry.