Micron Technology (NASDAQ:MU) has begun its latest fiscal year on a disastrous note. Its top and bottom lines plunged big time thanks to the clobbering memory prices have taken in recent quarters. What's more, the memory specialist's guidance didn't pass muster.

Micron's revenue fell to $5.14 billion in the first quarter of fiscal 2020 from $7.91 billion a year ago, a massive decline of 35%. Adjusted earnings fell to just $548 million from $3.5 billion a year ago. The chipmaker expects adjusted earnings of $0.35 per share this quarter on revenue of $4.5 billion-$4.8 billion.

That compares unfavorably to the year-ago period's revenue of $5.84 billion. However, the annual revenue decline would be substantially smaller this time at 20%, considering the mid-point of the guidance range. Though that's a significant drop, Micron investors are not complaining and seem to be buying more stock.

Let's take a look at a couple of reasons why that might be the case.

A buy button on a keyboard.

Image Source: Getty Images

1. DRAM and NAND prices are making a comeback

There have been signs of a turnaround in the prices of dynamic random access memory (DRAM) and NAND flash memory in recent months. Micron stock was recently upgraded based on this turnaround, and its latest results validate that business conditions are indeed improving.

Micron says that the crucial DRAM business, which accounts for 67% of the top line, saw a slight increase in revenue over the previous quarter. The average selling prices of DRAM were down in the upper single digits sequentially, while shipments increased 10%. What's more, Micron saw a mid-20% increase in DRAM shipments on an annual basis, indicating that demand is getting better.

The NAND business, which supplied 28% of the total revenue last quarter, was in much better shape. Bit shipments jumped in the mid-30% range year over year. The average selling price of NAND memory increased in the low single digits sequentially. Sequential revenue growth in the NAND flash segment came in at 18%.

Micron management added to investors' enthusiasm by calling the current quarter a trough in the current memory industry cycle. This is what Micron CEO Sanjay Mehrotra said on the latest earnings conference call:

Industry supply demand balance continues to improve in both DRAM and NAND. 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.

2. A sustained recovery is on the way

It is clear that Micron's promise of a recovery next year has got investors excited. The chipmaker believes that this recovery will be driven by a mix of strong demand and low supply. According to Micron's DRAM industry outlook, memory bit demand growth will be in the mid-teens, while bit supply growth will grow at a slower pace.

A similar trend is expected in the NAND flash market as well, with bit demand growth in the high 20% to low 30% range exceeding the estimated supply growth.

Micron expects a broad range of catalysts to drive memory demand next year. Solid-state drives (SSDs), for instance, are witnessing a supply shortage thanks to a cyclical growth in demand. According to third-party estimates, SSD prices are expected to jump 10% to 20% in the coming days as demand is outstripping supply growth. This sets the stage for further growth in the company's NAND flash memory business.

Meanwhile, an improvement in the smartphone market next year should be a tailwind for Micron's DRAM business. That's because Micron is prepared for the 5G (fifth-generation) smartphone revolution next year with its LPDDR5 DRAM, which will go into volume production in the ongoing quarter. LPDDR5 is reportedly 1.3 times faster than the DRAM found in today's smartphones and consumes 30% less power, making it ideal for deployment in 5G devices.

Now, 5G smartphones are expected to hit critical mass next year. IDC estimates that 5G smartphone shipments will hit 123.5 million units in 2020, accounting for 8.9% of overall shipments. They are eventually expected to account for 28.1% of global smartphone shipments by 2023. This opens up a long-term growth opportunity for Micron's DRAM business.

Moreover, Micron is now in a better position to take advantage of 5G smartphone growth as it has received licenses to resume shipments to Huawei. Mehrotra clarified that Micron will now be able to qualify new products for Huawei's mobile and server businesses. He said:

Prior to receiving these licenses, Entity List restrictions severely limited our ability to qualify new products at Huawei. Although we are now able to qualify new products with Huawei's mobile and server businesses, it will take some time before the qualifications are completed and contribute to revenue.

Mehrotra expects that it will take a couple of quarters before these licenses start affecting the company's revenue. But that would be just in time for the coming 5G revolution, with 7% of the Chinese population expected to use the technology next year, according to Jefferies.

In all, Micron looks set for a comeback in 2020 thanks to a favorable memory market. So it won't be surprising to see Micron Technology stock becoming a growth play once again next year.