After two years of soaring revenue and profits, driven by strong demand and rapid price increases for memory chips, the party is officially over for Micron Technology (MU -2.03%). Micron managed to grow revenue and adjusted earnings during its fiscal first quarter, but it was against a backdrop of tumbling prices and weakening demand. Micron's numbers are going to get ugly.

Too many chips

When Micron reported its fiscal fourth-quarter results in September, nary a thing was said about a potential downturn. Micron CEO Sanjay Mehrotra had this to say during the fourth-quarter earnings call:

We expect industry cyclicality to be more dampened than in the past, as industry supply growth from node transitions slows structurally and supply growth requires higher levels of CapEx. In addition, we continue to see robust, diversified demand drivers and are confident in the long-term outlook for our business.

The exterior of a Micron facility

Image source: Micron Technology.

If you took that statement at face value, despite Micron's chronic inability to forecast bad things until those bad things have already happened, then you were probably surprised by the first-quarter report. Average selling prices plunged across the board, with NAND suffering a low- to mid-teens percentage decline from the fourth quarter, and DRAM suffering a high single-digit percentage decline. Micron now expects industry supply growth to outpace demand growth for both types of memory in 2019, and it slashed its 2019 capital expenditure outlook by $1.25 billion as a result.

In other words, oversupply in the memory chip markets is back. Is this cycle going to be "more dampened" than previous cycles? Maybe, but it can still be pretty bad. Micron expects second-quarter revenue between $5.7 billion and $6.3 billion, and non-GAAP earnings per share between $1.65 and $1.85. The midpoints of those ranges represent year-over-year declines of 18% and 61%, respectively.

Micron's super-low price-to-earnings ratio doesn't look nearly as good when earnings are in a downward spiral.

It may take several quarters for Micron's numbers to bottom out. There are plenty of headwinds: a stagnating market for smartphones, the cryptocurrency hangover in the graphics industry, a shortage of CPUs negatively affecting demand, and inventory corrections at multiple customers in the cloud and enterprise markets.

Exactly how bad it gets for Micron is an open question. Micron posted a net loss in 2016, the last time supply outpaced demand. The trough in earnings may stay in positive territory this time around, but it will still be a lot lower than the peak.

Closing in on value territory

Micron stock now trades for just 1.2 times its tangible book value, down from a ratio of more than 3 in late 2017. That's not quite as low as it was in early 2016, when the stock bottomed out, but Micron's balance sheet has vastly improved since then. The company has a net cash position of a few billion dollars, which gives it increased flexibility.

One thing is for sure: Micron's results will get worse, potentially much worse, before they start getting better. The stock could still fall substantially from here, especially if the broader stock market continues to decline. But the valuation is starting to look enticing.