Memory chip giant Micron Technology (NASDAQ:MU) reported earnings this Wednesday evening, covering the first quarter of fiscal year 2020. The chipmaker exceeded Wall Street's expectations across the board, though the surprises were fairly small. Next-quarter guidance fell below the current analyst views, but Micron's shares still managed to rise approximately 5% in after-hours trading.

Let's see how Micron managed to impress investors despite a relatively gloomy set of next-period guidance targets.

Micron Technology's first-quarter results by the numbers

Metric

Q1 2020

Q1 2019

Change

Analyst Consensus

Revenue

$5.14 billion

$7.91 billion

(35%)

$5.01 billion

GAAP net income

$491 million

$3.29 billion

(85%)

N/A

Adjusted earnings per share (diluted)

$0.48

$2.97

(83%)

$0.47

Data source: Micron Technology. GAAP = generally accepted accounting principles.

The first-quarter results landed near the top end of management's revenue guidance, which called for sales of $5 billion plus-or-minus $200 million. Micron also came in just above the midpoint of the given guidance range for earnings near $0.46 per share. To be clear, those guidance ranges looked weak when they were announced, and it's not a terribly heroic feat to land barely above that low bar.

Furthermore, the second-quarter guidance calls for earnings in the neighborhood of $0.35 per share on revenue of approximately $4.65 billion. The Street consensus currently points to second-quarter earnings of roughly $0.41 per share on sales in the vicinity of $4.78 billion. The guidance targets also compare poorly to the year-ago period's results, where earnings stopped at $1.71 per share on revenue of $7.91 billion.

Where's the good news, then?

So far, this sounds like a terrible earnings report. Why did Micron's stock jump on this grim report?

As it turns out, Micron is experiencing improvements in both the DRAM and NAND memory markets. Here's how Micron CEO Sanjay Mehrotra opened up his remarks in this earnings call:

"Recent trends in our business give us optimism that our fiscal second quarter will mark the bottom for our financial performance, which we expect to start improving in our fiscal third quarter, with continued recovery in the second half of calendar 2020," he said.

The signs pointing to recovery just beyond the next quarter seem solid enough. Micron is moving its NAND chip shipments out of the plain commodity market and into higher-value contracts, thanks to the company's unique portfolio of high-speed and low-power solutions. The mix between high-value deals and commodity sales in the NAND sector stands at roughly 50-50 today, and management is targeting an 80% high-value mix in fiscal year 2021.

For DRAM chips, the new generation of 5G-capable smartphones tends to come with far larger memory allotments than the previous generation of flagships, which skews the supply-and-demand equation in a more profitable direction as phone makers can absorb a larger slice of Micron's production capacity. Data center servers are also thirsty for far more RAM than before, driven by the end users' desire to hold more data in the high-speed volatile memory banks. It's all about speeding up the processing of very large data sets.

Micron even sees positive demand trends in the automotive sector, even though actual car sales have been sluggish in recent quarters. The average automobile is shipping with more and more computing content these days, which raises the dollar value of the DRAM and NAND memory chips that are installed to support all of those sensor, navigation, engine control, and infotainment systems.

In front of a large sheet of uncut semiconductor wafers, one hand gives a thumbs-up sign and another gives a thumbs-down.

Image source: Getty Images.

Cyclical upswings

CFO Dave Zinsner pointed out that the expected low-water mark in the second quarter would leave Micron in a stronger position than the last memory market downturn did. The guidance points to second-quarter revenue roughly 60% above the lowest point of the previous cycle, which fell in the fiscal third quarter of 2016. Gross margins are also expected to land 9 percentage points above the results seen in that cyclical comparison from 2016.

The upswing that followed in the summer of 2016 was very good to us Micron shareholders. Two years later, share prices topped out 417% above the previous trough levels. These cyclical swings can be both brutal and rewarding, depending on which part of the cycle comes next. It looks like Micron is ready to start another multiyear climb here, driven by several large-scale technology trends combining to drive stronger demand for memory chips.