Micron's Fiscal First Quarter of 2019 Was OK. What's the Short-Term Outlook?

Memory chip maker Micron Technology (MU 0.33%) posted results from its first fiscal quarter of 2019 recently, and while the numbers were within management's projections, it's clear the inevitable slump in the digital memory industry is getting worse. No one ever knows how far these downturns will go, or how long they'll last, but comments on Micron's earnings call indicate the path through the woods hasn't ended yet.

First, some numbers...

Data source: Micron. P.p. = percentage point. 

Micron's numbers are much higher than they were a year ago, but the manufacturer is past its most recent peak. During the fourth quarter of fiscal year 2018 (which ended Aug. 30, 2018), revenue was $8.44 billion with a gross profit margin of 61%. Management validated some Wall Street analysts' prediction of a downturn with guidance given during the fourth-quarter earnings call. Revenue for the most recent quarter was expected to be $7.9 billion to $8.3 billion and gross profit margin 57% to 60%, so the company came in near the bottom of its first-quarter guidance.

Things are trending down for the second quarter, too. Revenue is expected to be $5.7 billion to $6.3 billion and gross margins 50% to 53%. That would be a year-over-year tanking from revenue of $7.35 billion and gross margin of 58.1%.

A light shining from midpoint 2019?

Micron's accelerating slowdown has to do with supply and demand. As pricing on memory chips was rising over the last few years, customers stocked up on product to lower the need for purchasing when prices peaked. Now that stockpiles are being worked through, memory-chip demand is back on the ebb, which will eat into Micron's high gross profit margins until the cycle resets.

Nevertheless, management reiterated that this time will be different -- a tone that has been struck for some time now. Indeed it could be, if for no other reason than the company's aggressive $10 billion share repurchase policy it announced earlier in 2018. The first quarter was the commencement of that program, kicking off with a $1.8 billion buyback, reducing total share count by 3.5%. Debt has also been paid down during the latest uptrend; long-term debt was $5.89 billion at the end of May 2018 and was paid down to just $3.74 billion at the end of the first quarter.

Besides stronger financials, CEO Sanjay Mehrota remains confident in the long-term trends that will increase demand for memory in data centers, cars, and other connected devices. He noted that things should be turning more optimistic in 2019.

While our customers' end market demand in segments like industrial, cloud, enterprise, and client compute is healthy, this inventory adjustment period will contribute to weaker demand conditions in DRAM [memory] that will likely persist through the first half of calendar 2019. ... Based on our current demand estimates, our DRAM bit shipments for the fiscal second quarter will decline sequentially but, more importantly, are likely to be flat to down on a year-over-year basis as well, consistent with a weak quarter for the memory industry and significantly below the long-term demand growth rate. This shows that inventory adjustments by our customers are well underway.

Barring weaker macroeconomic conditions, we expect our DRAM bit demand to grow sequentially in our fiscal third quarter. Looking beyond fiscal Q3, as we enter the second half of calendar 2019, we expect a healthier demand environment alongside an improved industry supply picture, which should contribute to improved financial performance.

The digital memory industry's history of extreme booms and busts is looming large over investors' mood. With a couple of quarters expected to work through the supply glut, now's not the time to go all-in on Micron. Instead, nibble a little bit at a time through the downturn to scale into the position you want.