Memory chip manufacturer Micron Technology (NASDAQ:MU) is dealing with weak demand and slumping prices for its products. Prices for NAND chips, which are used for flash memory and solid-state drives, have been tumbling for a while. Prices for DRAM chips, critical for PCs, smartphones, and servers, have also started to decline as once-robust demand has dried up.
Micron's management was optimistic about a recovery in the second half of calendar 2019 when the company reported its fiscal first-quarter results in December. The fiscal second quarter will be rough: Revenue is expected to slump 18% year over year, while adjusted earnings will be down around 60%. But Micron CEO Sanjay Mehrotra said during the earnings call that the company expects "a healthier demand environment alongside an improved industry supply picture" in the back half of the calendar year.
Micron expects a recovery later this year despite a slew of headwinds facing the memory chip markets. Global smartphone sales are in decline; sales of graphics cards have plummeted as NVIDIA and AMD work through excess inventory built up after the cryptocurrency bubble burst; some of Micron's cloud and enterprise customers are buying less as they work through their own excess inventory of memory chips; and various data center-dependent companies have warned about weakening demand, including Intel and NVIDIA. Not to mention trade tensions between the U.S. and China and global economic uncertainty.
A pair of analysts is skeptical that a quick recovery is in the cards. Goldman Sachs analyst Mark Delaney wrote in a note to clients, as reported by CNBC, "Our recent industry discussions suggest that memory fundamentals remain very soft, and prices continue to decline." Delaney said that scenarios that seemed unlikely six months ago have now become far more likely. Delaney's new base case for Micron's annual earnings per share is $3 to $4, which was the downside case last September.
Micron reported adjusted earnings of $11.95 per share in fiscal 2018, which ended in September. Goldman's new base case forecast puts EPS as much as 75% lower.
Morgan Stanley analyst Joseph Moore has also jumped aboard the skepticism train. Moore believes that a second-half recovery for Micron's DRAM business is "highly unlikely." He sees DRAM remaining oversupplied even after cloud-related demand recovers, and he noted that consumption would need to grow by 35% this year just to keep inventories in check.
A recovery will come, but maybe not this year
Is Micron being too optimistic? Or are these analysts being too pessimistic? Predicting exactly when a downturn in the memory chip markets will end is hard, so we won't know until conditions start to improve. But Micron has a poor track record when it comes to forecasting trouble, so I wouldn't trust management's rosy outlook. And I certainly wouldn't make investment decisions based on it.
If Micron's annual earnings only decline to $3 to $4 per share during this downturn, that would be tame historically. The company posted net losses in fiscal 2009, 2012, and 2016. The current downturn may not end up being that severe, but there's no reason to assume a return to red ink is impossible.
Shares of Micron have recovered a bit since bottoming out in December, gaining around 30% after being cut in half since mid-2018. But this rally may be premature. Micron won't start to show signs of life until 2020 if these analysts are right, and that could mean more pain for investors this year.