Micron Technology (NASDAQ:MU) sprang a surprise in this coronavirus-rattled stock market as its fiscal 2020 second-quarter earnings turned out to be better than Wall Street's estimates. Though the memory specialist's operations were hindered by the COVID-19 outbreak, there was a flip side as well that led to an increase in demand for its data center products as more people switched to working from home.
Tight supply conditions also helped Micron as the pandemic has disrupted supply chains across the globe. And the company pointed out that original equipment manufacturers (OEMs) in China are gradually returning to "full production." It is also witnessing a rebound in smartphone manufacturing in China.
Not surprisingly, Micron shares have recovered impressive ground of late thanks to the positives in the earnings report. But will the stock be able to keep up this momentum? Let's find out.
What's driving Micron?
Micron made a couple of smart moves to tide over the coronavirus-triggered disruptions that began around the middle of its recently reported quarter that ended on Feb. 28.
The company switched its production to serve the data-center market instead of smartphones. Its foresight was on point as companies started encouraging their employees to work from home, thereby increasing the load on data centers.
Micron management also pointed out that an increase in demand for e-commerce boosted its data-center business last quarter. More importantly, the chipmaker had equipped itself to serve the surge in data-center demand to ensure an ample supply of raw materials. To achieve this, Micron started storing more raw materials at its production sites and also brought more suppliers into its fold to reduce the risk of dependence on only a few suppliers.
Micron had prepared well for the novel coronavirus-outbreak and that helped it take advantage of stable memory pricing during the quarter. Micron's dynamic random access memory (DRAM) average selling price was flat sequentially, even though shipments were down by 10%. The company's NAND flash shipments were down in the low-single digits on a sequential basis, but the average selling price jumped in the upper single digits.
Micron was eventually able to beat its own guidance as a result of these moves, and that's commendable under the current circumstances. What's even more impressive is that the company's third-quarter guidance turned out to be better than forecast. Micron expects its revenue to increase 2% annually at the mid-point of its $4.6 billion to $5.2 billion range.
This indicates that Micron's financial performance may have actually hit a bottom in the second quarter as the company had originally forecast, despite the COVID-19 outbreak. So the stock's recent rally doesn't look out of place as it did remarkably well during difficult times.
However, investors shouldn't ignore the hints Micron management dropped about the negative impact that the pandemic might have on its results in subsequent quarters.
Don't miss these warnings
Micron management admitted on the latest earnings conference call that the COVID-19 outbreak has created a "very fluid situation, and we will learn more about the virus, its spread and its economic impact over the next few weeks and months."
Micron says that there isn't much visibility about the demand and supply environment. For instance, CFO Dave Zinsner pointed out that "[it is] unclear the extent to which inventory builds related to COVID supply concerns might be masking weakness in end demand." Moreover, the company continues to face the risk of disruption on both the production and logistics front because of lockdowns and restrictions imposed by governments around the globe.
Micron's factories in Malaysia had to be shut down after the country's government restricted movement of goods, closed borders, and shut down most businesses. Though the government eventually added semiconductors to the list of essential services, and the factories came back online, Micron said that production was happening on a "very limited basis."
These unprecedented variables are the reason why Micron says that its wide third-quarter guidance range does not "reflect the magnitude of all the risks, and results could vary significantly from these ranges."
So it may not be a good idea to expect that Micron will remain a growth stock amid all the uncertainty surrounding its business. Investors' enthusiasm could quickly fade away if the business environment becomes more challenging. That could easily erase the stock's recent gains, considering that Micron trades at a rich 21 times trailing earnings when compared to its five-year average price-to-earnings (P/E) multiple of 13.