Shares of Micron Technology (MU 0.49%) tumbled nearly 20% over the past month as the novel coronavirus (COVID-19) pandemic hammered the broader markets. Yet the memory chipmaker's second-quarter numbers recently beat analysts' estimates, and its guidance sparked a few flickers of hope. So can Micron withstand the market downturn and emerge a stronger company?
The key numbers
Micron's revenue fell 18% annually to $4.8 billion during the quarter, which beat estimates by $110 million. Its non-GAAP gross margin plunged from 50.2% to 29.1%.
Image source: Getty Images.
Those numbers seem horrendous, but Micron's revenue decline decelerated significantly from its previous quarters as its gross margin expanded sequentially:
|
Metric |
Q2 2019 |
Q3 2019 |
Q4 2019 |
Q1 2020 |
Q2 2020 |
|---|---|---|---|---|---|
|
Revenue Growth (YOY) |
(21%) |
(39%) |
(42%) |
(35%) |
(18%) |
|
Gross Margin* |
50.2% |
39.3% |
30.6% |
27.3% |
29.1% |
YOY = Year-over-year. Source: Micron quarterly reports. *Non-GAAP.
Micron's memory business is cyclical, and it suffered from a supply glut and tumbling prices for DRAM and NAND chips throughout 2019. Therefore, Micron's second-quarter results indicate the market is gradually recovering as the industry throttles its production of new chips.
During the second quarter, Micron generated 64% of its revenue from DRAM chips, 32% from NAND chips, and the rest from other types of memory. DRAM revenue fell 26% annually during the quarter as NAND revenue dipped 9%.
By end market, compute and networking customers accounted for 41% of its revenue, mobile devices accounted for 26%, followed by the storage (18%) and embedded (14%) markets. Revenue fell by the double-digits annually across all four markets, with the mobile market faring the worst with a 22% drop.
Micron's non-GAAP net income fell 74% annually to $517 million, or $0.45 per share -- which still beat estimates by eight cents.
Does Micron see a cyclical bottom?
Micron is responding to the coronavirus crisis in four main ways: identifying and rectifying supply chain gaps, increasing its on-hand inventory of raw materials, multi-sourcing components to reduce its dependence on individual suppliers, and boosting its assembly and test capacities.
Image source: Getty Images.
As for near-term demand, Micron expects data centers to buy more chips to address the surging bandwidth requirements for remote work, gaming, and e-commerce activities throughout the pandemic. Micron stated that it's already seeing supply shortages in the data center market -- which suggests that market prices could keep climbing throughout 2020.
Micron also expects to sell more chips to notebook manufacturers, as more employees work from home and students enroll in virtual classes. It expects the strength of those businesses to partly offset slower demand across the smartphone, consumer electronics, and automotive markets throughout the second half of the year.
But during the conference call, Micron CEO Sanjay Mehrotra noted that many manufacturers in China had returned to "full production," and that it "recently started to see China's smartphone manufacturing volumes recover." Those encouraging statements bode well for the company, which generated 15% of its revenue from mainland China last year.
For the third quarter, Micron anticipates -4% to +9% annual revenue growth, a gross margin of 29.5%-32.5%, and a non-GAAP earnings decline of 33%-62%. Those estimates all suggest that Micron's businesses have finally cleared a cyclical trough.
But mind the headwinds
Micron is the world's third-largest DRAM manufacturer and fourth-largest NAND manufacturer, but it still faces intense competition from market leader Samsung (OTC: SSNLF) and other rivals in both markets.
Market prices are currently improving because the top chipmakers have scaled back their production, but it just takes one defiant company to disrupt the fragile recovery by ramping up production to boost revenue -- which is a distinct possibility as the coronavirus crisis chokes multiple industries.
China, which has been developing its own DRAM and NAND chips to reduce its dependence on foreign chips, could also flood the market with cheaper chips and drive down prices. Chinese regulators also notably probed Micron, Samsung, and other leading memory chipmakers in 2018 for allegedly fixing prices.
There's also no guarantee that steep declines in the consumer electronics and auto markets, which remain directly in the blast zone of the pandemic, won't offset Micron's gains in the data center market.
Is it the right time to buy Micron?
Micron didn't provide guidance for the full year, but Wall Street expects its revenue to decline 14% this year before rebounding 21% in 2021. Its earnings are expected to tumble 65% this year before more than doubling next year.
Micron's stock looks fairly cheap at 18 times forward earnings, but those valuations are based on wobbly estimates which might not fully account for the pandemic's impact yet. Its stock could gradually climb higher as memory prices warm up, but investors should be wary of the competitive and regulatory risks.
