What: Shares of Micron (NASDAQ:MU), a manufacturer of DRAM and NAND memory chips, sank on Friday after the company missed analyst estimates across the board when it reported its fiscal-third-quarter revenue. At 11:30 Friday morning, the stock was down about 18.5%.
So what: Micron reported quarterly revenue of $3.85 billion, down 3% year-over-year and about $60 million shy of analyst estimates. Sixty-one percent of Micron's revenue came from DRAM, a business that suffered from weak demand for PCs, and 32% came from NAND, which posted flat unit bit growth during the quarter.
Micron's Compute Networking segment, which serves the PC and server markets, saw revenue decline by 17% sequentially, with strong growth in the cloud server business unable to counteract weakness in PCs. The Storage segment and the Embedded segment also shrank, with revenue falling by 5.6% and 3.8%, respectively, while the Mobile segment posted 9.6% growth thanks to increased content in mobile devices.
Micron reported a non-GAAP EPS of $0.54, down from $0.81 in the previous quarter and three cents shy of analyst estimates. Gross margin slumped both sequentially and year-over-year, while research and development spending rose despite falling revenue. This led to an operating margin of 16.4%, down from 21.1% during the same period last year.
Micron expects DRAM bit growth to rise in the low single digits at best during the fourth quarter, while NAND bit growth is expected to be down in the low-to-mid single digits. DRAM average selling prices are expected to decline in the mid-to-high single digits, which will likely continue to hurt Micron's gross margin, while NAND average selling prices are expected to be flat.
Now what: While just three companies, including Micron, control nearly all of the DRAM market, it's still a cyclical industry, and Micron is very sensitive to DRAM pricing. Investors were clearly disappointed in Micron's results and its guidance, sending the stock down to just six times trailing-12-month earnings, suggesting that the market expects Micron's results to deteriorate significantly going forward.
Micron's gross margins have fluctuated wildly over the past decade, and the decline during the third quarter is pretty standard for this industry. Investors considering Micron should base their decision not on the results from any single period, as fiscal 2014 was a record year for Micron, but on the average performance over a long period of time, thus capturing the ups and downs of the DRAM market.