Shares of Micron (MU +5.13%) surged from less than $10 in 2016 to low $60s last year as rising DRAM and NAND prices boosted the memory chipmaker's revenue and profits. However, that rally ended in the second half of 2018, as a supply glut and soft enterprise spending caused market prices to plummet. Trade tensions and macro issues in certain markets exacerbated the pain.
Micron's stock dipped below $30 by late 2018, but it rebounded to the low $40s this year on hopes that memory prices are bottoming out. Is that outlook too optimistic? Let's take a closer look at Micron to see if investors should buy this cyclical stock.
Image source: Getty Images.
The key facts
Micron is the world's third-largest maker of DRAM chips and fourth-largest maker of NAND chips. DRAM is the memory used in RAM sticks for PCs and servers, and NAND is the rewritable memory used in SD cards, USB sticks, and SSDs (solid-state drives).
Samsung (NASDAQOTH: SSNLF) is the leader in both markets. Micron's other main DRAM rival is SK Hynix (NASDAQOTH: HXSCL), and it competes against Toshiba, Western Digital (WDC +4.25%) (which owns SanDisk), and SK Hynix in the NAND market.
Unlike Samsung and WD, which are diversified across multiple markets, Micron is considered a "pure play" on the DRAM and NAND markets. As a result, Micron benefits more from cyclically higher prices than those companies, but gets hit harder when the tide turns. Here's how badly tumbling memory prices hurt Micron over the past year:
|
Metric |
Q2 2018 |
Q3 2018 |
Q4 2018 |
Q1 2019 |
Q2 2019 |
|---|---|---|---|---|---|
|
Revenue |
$7.4 billion |
$7.8 billion |
$8.4 billion |
$7.9 billion |
$5.8 billion |
|
YOY growth |
58% |
40% |
38% |
16% |
(21%) |
Source: Micron quarterly reports.
During the second quarter, Micron's compute and networking revenues declined 35% annually to $2.4 billion, its mobile revenues rose 3% to $1.6 billion, its storage revenues tumbled 19% to $1 billion, and its embedded revenues dipped 4% to $800 million.
Its total DRAM revenue fell 28% annually and 30% sequentially, as its average selling prices (ASP) fell in the "low 20% range" from the first quarter. Its shipments, measured in bits, slid by the mid-single digits annually and double digits sequentially.
Its NAND revenue fell 2% annually and 18% sequentially, as its ASP dropped in the "mid 20% range" from the first quarter, according to CFO Dave Zinsner. However, its NAND shipments grew by the high-single digits sequentially on higher orders from a large customer.
Contracting margins and a mixed outlook
All those declines caused Micron's margins to contract annually and sequentially in the second quarter.
|
Metric (Non-GAAP) |
Q2 2018 |
Q1 2019 |
Q2 2019 |
|---|---|---|---|
|
Gross margin |
58.4% |
59% |
50.2% |
|
Operating margin |
49.4% |
49.1% |
36.2% |
Source: Micron quarterly reports. GAAP = generally accepted accounting principles.
For the third quarter, Micron expects its revenue to decline 38% annually to about $4.8 billion and for its gross margin to slip to 37%-40%.
That outlook sounds dire, but Zinsner expects Micron's DRAM shipments to improve sequentially in the third quarter and accelerate with "much higher" sales in the fourth quarter. Zinsner expects a "modest" sequential decline in NAND shipments in the third quarter and for growth to resume in the fourth quarter -- possibly on higher demand for memory chips in other markets like Internet of Things (IoT) devices and connected cars.
Image source: Getty Images.
Micron's forecast indicates that DRAM and NAND prices could bottom out during the fourth quarter and head higher in 2020. Until then, it's cutting its full-year capex from a prior range of $9 billion-$9.5 billion to $9 billion -- which indicates that it doesn't want to exacerbate the supply glut by producing more chips.
Samsung, SK Hynix, and WD all made similar statements, but it's unclear how long that unwritten truce will last, since one of the market leaders might decide to sacrifice near-term margins for longer-term market-share gains. In the meantime, Micron plans to spend at least 50% of its free cash flow (FCF) on buybacks.
This makes sense since the stock trades at just seven times forward earnings, but the stock could still revisit its 2018 lows if memory prices don't rebound on schedule. Several major headwinds could cause that to happen -- including trade tensions with China, higher tariffs, the ongoing CPU shortage throttling PC sales, China's ongoing attempts to produce cheap memory chips, and even a global recession.
Check out the latest earnings call transcript for Micron.
Should you buy Micron?
In a more placid market, I'd buy Micron as a cheap cyclical play. But the market is volatile, and I'm not convinced that memory prices will completely recover in the second half of the year. Micron's downside is likely limited at these levels, but I'm sticking with less cyclical tech stocks until the smoke clears.
