There's at Least One More Bad Quarter Left for Micron

The memory manufacturer still thinks the bottom will come before year-end.

Nicholas Rossolillo
Nicholas Rossolillo
Mar 25, 2019 at 10:05AM
Technology and Telecom

Though the digital memory industry bear market is raging, investors took some solace in Micron Technology's (NASDAQ:MU) fiscal 2019 second-quarter report -- which featured in-line results but an ugly outlook for the third quarter. That would make it the third straight quarter of sequential declines, a run that could continue well into the current year. However, shares rose some 8% the day following results on March 20, despite the falling numbers.

Nevertheless, Micron continues to call for a second-half 2019 rebound, which other chipmakers have seconded multiple times. The talk is encouraging, but it still isn't the time to pile into this stock quite yet.

Another swipe from the memory chip bear

Chip manufacturers like Micron who specialize in memory products are in a cyclical business. Booms and busts are frequent, and 2019 is going to be one of those busts after a couple of years of record sales for digital memory.

Check out the latest earnings call transcript for Micron Technology.

Metric

Three Months Ended 2/28/19

Three Months Ended 3/1/18

YOY Change

Revenue

$5.84 billion

$7.35 billion

(21%)

Gross profit margin

49.1%

58.1%

(9.0 p.p.)

Operating income

$1.96 billion

$3.57 billion

(45%)

Adjusted earnings per share

$1.71

$2.82

(39%)

Data source: Micron Technology. YOY = year over year. P.p. = percentage point. 

The good news? Even though Micron's business is getting the punching bag treatment as end customers in the personal computer and data center markets work through too much inventory, the company is still profitable. As it promised before the current downturn, management has been using its free cash to repurchase shares to keep the stock propped up. It bought $702 million worth during the quarter, leaving another $7.5 billion left over on its current plan for further share buybacks. With Micron's stock up 37% since the start of 2019, that's been money well spent so far.

An artist's illustration of digital data. Graphs a charts are shown getting shared around the globe.

Image source: Getty Images.

How bad will it get?

As always with cyclical businesses, what just happened is of far less importance than what will. Until this recent report, Micron's management had been calling for the current downturn to be a mild one. Not so anymore. DRAM memory (used in things like personal computers) and NAND memory (mobile devices) prices are both in free fall at the moment as ordering from customers slows down. Micron has been able to offset that with shipments of chips with higher bit counts, resulting in higher revenue and profit per product sold, but the offset hasn't completely made up lost ground.

As a result, the outlook for the fiscal 2019 third quarter is for another decline. Management guided for revenue between $4.6 and $5.0 billion, a gross profit margin of 37% to 40%, and earnings per share of $0.75 to $0.95. In other words, another steep sequential decline, but still profitable. That means this current downturn is still a long way from past bear markets that pushed Micron into unprofitable territory. Plus, management reiterated on the conference call that it still thinks business will rebound by the end of the 2019 calendar year.

MU Operating Income (TTM) Chart

Data by YCharts.

However, CFO Dave Zinsner admitted that their ability to see how the market for digital memory will unfold "remains low." Data center demand, new CPUs for personal computers, and an increase in smartphone and other mobile device shipments in 2019 are all expected, all of which are positive for Micron. Those expectations could change quickly, though, with customers continuing to delay digital memory ordering if supply stays elevated.

Nevertheless, Micron management's continued optimism was enough for investors, sending the stock higher immediately after the report. Keep in mind this is a volatile stock, though, and the outlook can change fast. There's at least one more quarter of pain left, maybe more. This digital memory bear market will eventually pass, but investors should temper the desire to chase this stock by buying a little bit at a time.