What happened

Shares of memory chip manufacturer Micron Technology (MU 5.01%) jumped on Wednesday following a fiscal third-quarter report that beat expectations. While Micron's revenue and earnings plunged due to tumbling prices for memory chips, investors were expecting worse. The stock was up about 14.5% at 11:25 a.m. EDT.

So what

Micron reported third-quarter revenue of $4.79 billion, down 38.6% year over year but $90 million higher than the average analyst estimate. Revenue from dynamic random access memory, or DRAM, fell 19% from the second quarter thanks to a near-20% decline in average selling price. Revenue from NAND chips was down 18% from the second quarter, with both bit shipments and average selling price dropping.

A DRAM module.

A DRAM module. Image source: Micron.

Non-GAAP (adjusted) earnings per share came in at $1.05, down 66.7% year over year but $0.26 better than analysts were expecting. Non-GAAP gross margin was 39.3%, down from 60.9% in the prior-year period.

One thing contributing to the optimism was Micron's update on Huawei. The U.S. blacklisting of Huawei put about 13% of Micron's annual revenue in jeopardy, but the company has been able to find a loophole. Micron has started shipping some orders of certain products to Huawei in the past two weeks, reducing the impact of the ban.

Now what

Micron's guidance for its fourth fiscal quarter was mixed. The company expects revenue of $4.5 billion, plus or minus $200 million, close to the average analyst estimate of $4.56 billion. Non-GAAP EPS of $0.45, plus or minus $0.07, is anticipated, well short of analyst forecasts for $0.70.

Micron expects DRAM bit demand to improve in the second half of the calendar year as customer inventory corrections play out. However, that doesn't mean that pricing will improve. Shipping more bits at prices low enough to more than offset any per-bit cost reductions will take a bite out of the company's margins. Non-GAAP gross margin is expected to fall to just 29% in the fourth fiscal quarter.

Micron continues to be optimistic that this downturn is nearing an end, and the market is buying into that story. But given how wrong the company has been over the past year about demand and pricing, it would be wise to take its outlook with a grain of salt.