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Will Micron Technology Make It or Break It This Earnings Season?

By Harsh Chauhan – Jun 23, 2020 at 7:00AM

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Waning memory prices pose a challenge.

Micron Technology (MU -2.44%) has made a terrific comeback since the March stock market crash. The chipmaker has rallied thanks to an improvement in the memory market's dynamics as well as the broader turnaround in the semiconductor sector that has rubbed off positively on its shares.

MU Chart

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The memory specialist has added to investors' enthusiasm by lifting its fiscal third-quarter guidance, aided by a jump in demand and an improvement in the prices of DRAM (dynamic random-access memory) and NAND flash. So expectations are high going into Micron's upcoming quarterly report, as Wall Street analysts have raised their price targets on the back of the chipmaker's upbeat guidance.

So it is critical for Micron to deliver solid guidance numbers when it releases its fiscal third-quarter results next week so it can sustain its upward momentum. But a few dark clouds are on the horizon.

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Image source: Getty Images.

Could these developments dampen Micron's rise?

Memory prices have ticked up in recent weeks on account of supply chain disruptions caused by the COVID-19 pandemic. At the same time, memory demand has remained strong. An increase in data center workloads and the shift to working from home has led to higher demand for solid-state drives (SSDs), creating an ideal situation for Micron amid the novel coronavirus outbreak.

But clouds of uncertainty have started hovering over the memory market's prospects of late. Data from memory market tracker DRAMeXchange reveals that prices have started trending lower after hitting a peak in April. According to the report, the spot price of the benchmark 8GB DDR4 DRAM has fallen from $3.60 at the beginning of April to $2.90 in mid-June. That's a steep decline of nearly 20% in a space of just over two months.

The last time the spot DRAM price traded below the $3 mark was in December of last year. DRAMeXchange attributes this decline to a drop in demand for smartphones and other consumer electronic devices. The drop in contract prices doesn't bode well for Micron, as the company gets 64% of its revenue from the DRAM market.

Weakness in this segment has weighed on Micron's top line in recent quarters. For instance, the company witnessed a 26% annual decline in DRAM revenue in the fiscal second quarter thanks to weak pricing, even though bit shipments were up 20% from the prior-year quarter. As a result, the company's overall revenue fell nearly 18% over the prior-year period.

But there's a chance that Micron may be able to overcome the recent drop in spot DRAM prices, as the memory market has a few catalysts up its sleeve.

No reason to worry yet

Investors should note that 90% of DRAM memory is traded on contract prices, which may be negotiated either monthly or quarterly. So there may not be an immediate impact on Micron's performance because of the recent drop in DRAM prices.

According to DRAMeXchange, contract DRAM prices for the second quarter of 2020 are expected to climb 11% from the first quarter. The firm estimates that contract DRAM price growth for the third quarter of the year could slow down thanks to a bump in output and higher inventory levels. Samsung and SK Hynix, Micron's rivals, are reportedly expanding their DRAM capacity, and that could dent the favorable demand-supply dynamics of the market.

DRAMeXchange forecasts that server DRAM demand could slow down in the second half of 2020 as data center investments drop after surging in the first half. But at the same time, any weakness in data center-related demand could be offset by an improvement in mobile DRAM demand toward the back end of the year.

Micron gets 27% of its total revenue from the mobile segment. This division looks all set to step on the gas, as mobile DRAM demand is anticipated to rise substantially in the 5G era because of higher capacities and a sharp rise in volumes.

On the other hand, Micron should also witness a jump in demand for specialty DRAM as graphics cards manufacturers NVIDIA and Advanced Micro Devices come up with their next-generation offerings. Specialty DRAM forms a part of Micron's compute and networking business unit that produced nearly 42% of its total revenue last year.

Another catalyst could come in the form of gaming consoles. Sony and Microsoft are getting ready to launch their next-generation consoles by the end of the year, in time for the holiday season. Both the consoles will be equipped with an SSD for storing data instead of traditional hard-disk drives to substantially cut loading times.

This development could give Micron's storage business -- accounting for 16% of total revenue -- a nice boost in the coming quarters by boosting NAND flash demand.

In all, the memory market could find a fresh set of growth drivers in the second half of the year to offset the projected decline in data center investments. So don't be surprised to see Micron Technology deliver upbeat guidance once again and remain a growth stock despite concerns surrounding spot DRAM prices.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and NVIDIA and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Micron Technology, Inc. Stock Quote
Micron Technology, Inc.
$48.88 (-2.44%) $-1.22
Microsoft Corporation Stock Quote
Microsoft Corporation
$237.45 (-0.20%) $0.47
Sony Corporation Stock Quote
Sony Corporation
$66.70 (-2.53%) $-1.73
NVIDIA Corporation Stock Quote
NVIDIA Corporation
$122.28 (-2.30%) $-2.88
Advanced Micro Devices, Inc. Stock Quote
Advanced Micro Devices, Inc.
$66.30 (-2.44%) $-1.66

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