Memory-chip manufacturer Micron Technology (MU 3.06%) is set to report its fiscal third-quarter results on Tuesday, June 25, after the market closes. It won't be pretty: The company is expecting gargantuan declines in both revenue and earnings as weak demand and brutal price drops wreak havoc on the industry.
It wasn't too long ago that Micron was producing record profits as management talked up the idea that future cycles would be more muted thanks to structural changes in the industry. It was a take on the classic "this time is different" mantra that tends to pop up whenever everything is going right. Sometimes things are different, but this does not appear to be one of those times.
Image source: Micron.
Vanishing profits
Micron expects to produce revenue of $4.8 billion, plus or minus $200 million, in the third quarter. That's down a whopping 38.5% year over year. Multiple factors are conspiring to drive down Micron's revenue, including slumping chip prices, elevated customer inventory levels, weakening demand from server and enterprise customers, CPU shortages, and uncertainty driven by macroeconomic developments.
In the second quarter, Micron saw average selling prices for both DRAM and NAND chips crash more than 20% from the first quarter. Those low prices helped spur a small increase in NAND sales volume, but DRAM sales volume still tumbled by more than 10%.
The bottom line will look even worse. Micron expects to report adjusted earnings per share of just $0.85, plus or minus $0.10, for the third quarter. That's down a staggering 73% year over year.
When Micron reported its second-quarter results, the company said it expected to see improvements in DRAM sales volume in the next quarter. At the same time, it admitted that prices had fallen more than expected, and that it's outlook for the rest of 2019 had been moderated. Given the developments of the past few months, expect to hear the phrase "worse than expected" during Micron's third-quarter earnings call.
Worse before it gets better
The trade war between the U.S. and China has escalated in the past few months, creating uncertainty and spurring caution. On top of additional tariffs, the U.S. blacklisting of Chinese tech company Huawei is having an immediate effect on Micron. Huawei accounted for 13% of Micron's total revenue in the first six months of 2019, and that revenue is now gone for the foreseeable future.
In addition to immediately reducing sales, this ban could exacerbate the high inventory levels and pricing declines that are plaguing the industry. DRAMeXchange, a provider of market research in the industry, now expects DRAM prices to slump by 10% to 15% in the calendar third quarter, with a 10% decline in the calendar fourth quarter. If this more pessimistic forecast bears out, Micron's margins will be under pressure for the rest of the year.
Analysts are also becoming more pessimistic about a Micron recovery. Analysts at Baird believe that DRAM and NAND inventories are roughly double the normal levels, meaning that a recovery in sales volume looks unlikely anytime soon. Analysts at Evercore aren't expecting a memory recovery until the second half of 2020.
Micron may very well fall short of its third-quarter guidance because of these developments, and it's almost a guarantee that its fourth-quarter guidance will look even worse.
Is it time to buy?
Given everything that's going wrong for Micron, it's hard to want to buy the stock. But the best time to invest in Micron in the past has been when the future looked bleak. This is a highly cyclical industry, and Micron routinely swings from profits to losses. It's now looking more likely that Micron will turn unprofitable before this cycle bottoms out.
Just as periods of euphoria and fat profits have never lasted forever, neither have downturns. Micron will eventually recover from this, although the unusually high profitability it enjoyed in the past few years probably won't return anytime soon.
Micron currently trades right around its book value. The stock has dipped below book value in previous downturns, but it's much closer to the bottom than the top right now. A weak third-quarter report may provide the necessary pessimism to drive the stock even lower.
Buying Micron stock today, or after a potential earnings-fueled decline, isn't an unreasonable thing to do, given the valuation. You'll need an iron stomach, because the situation is almost certainly going to get worse for the company. And the stock could drop much further, especially if the trade war intensifies.
We'll get a better idea of how much worse things will get for Micron when it reports its third-quarter results on Tuesday. If it starts to feel like the sky is falling, it may be time to hold your nose and buy.
