Micron Surprises Investors

"Better than feared" is good enough during the current semiconductor downturn.

Nicholas Rossolillo
Nicholas Rossolillo
Jun 26, 2019 at 7:04PM
Technology and Telecom

The "this time is different" mentality can be catastrophic in investing. But sometimes things are different, or at least different enough. Memory chip maker Micron Technologies (NASDAQ:MU) is proof of that -- or at least it has been so far during the current digital memory bear market.

The company's fiscal 2019 third quarter was a bad one on all counts except one: It was better than investors feared. And while the outlook would indicate the bottom hasn't been reached yet, Micron shareholders can take comfort in an outlook that keeps the company in profitable territory -- a key difference from past chip industry nosedives.

Three down, one to go...

A number of headwinds have conspired recently to work against the memory chip industry. In what is a cyclical business at best, oversupply of product crops up from time to time, lowering demand and pricing until excess inventory is worked through. That is the current situation, which is coming up on a year in the making.

A silhouette of a person filled in with digital data.

Image source: Getty Images.

If the dreaded digital memory downcycle wasn't bad enough, adding in a U.S.-China trade war made things look downright dreadful. Since China is a major customer for the U.S. semiconductor industry, tariffs and other manufacturing process disruptions have only agitated the bears. The latest strike in the battle was the U.S. crackdown on Chinese tech titan Huawei, which adversely affected other chip companies as well. Micron was no exception.

CEO Sanjay Mehrotra had this to say on the June 25 quarterly call:

As you know, effective May 16th, the US Commerce Department's Bureau of Industry and Security or BIS added Huawei and 68 of its non-US affiliates to the BIS entity list. To ensure compliance, Micron immediately suspended shipments to Huawei and began a review of Micron products sold to Huawei to determine whether they are subject to the imposed restrictions. Through this review, we determined that we could lawfully resume shipping a subset of current products ... We have started shipping some orders of those products to Huawei in the last two weeks.

Thus, the fiscal 2019 third quarter, which ended in late May, saw a sequential acceleration in sales decline, but the slide was not as bad as many had feared. With three-fourths of the fiscal year in the books, Micron is on track to deliver a forgettable performance, but it's not as distressing as in past downturns, when rampant operating losses were the headline.

Metric

9 Months Ended May 30, 2019

9 Months Ended May 31, 2018

Change

Revenue

$18.5 billion

$22.0 billion

(16%)

Gross profit margin

50.2%

58.0%

(7.8 pp)

Operating income

$6.73 billion

$10.6 billion

(37%)

Adjusted earnings per share

$5.73

$8.42

(32%)

Data source: Micron Technologies. pp = percentage point.

Cloudy with a chance of anyone's guess

On one hand, there's hope for the immediate future. Micron continues to repurchase shares at a torrid pace (it has reduced share count by 8% in the last 12 months, which has propped up earnings); management said it has resumed shipping some products to Huawei that are not included in the recent trade ban; and a possible trade deal with China by year's end, or at least a trade war reprieve, has also been teased.

But up to this point, a tease is all it's been. Until there is more solid evidence of relief, the business environment for chipmakers will continue to be a challenging one. With that as a backdrop, Micron management offered up more negative guidance for the current quarter. At the midpoint of expectations, revenue was forecast to be down 47% year over year to $4.5 billion. Adjusted earnings should be $0.45, compared to $3.53 a year ago. Yikes.

Since I'm all about the silver lining, here it is: Micron is still profitable in spite of all sorts of bad news being hurled at it. That could change in subsequent quarters, especially if the current downtrend doesn't ease up, but for now, that is far enough in the future that bottom-line red is just speculation. The digital memory maker is far from perfect, but it has done much better than expected during this last downturn.