After a long period of rapidly rising revenue and profits, memory chip manufacturer Micron (NASDAQ: MU) now finds itself on the unpleasant side of what could be a particularly brutal cycle. A confluence of factors has led memory chip prices to plunge, and there's no telling how long the pain will last.
Micron already expects its bottom line to plummet in the second quarter, results for which the company will report after the market closes on Wednesday, March 20. But with PC DRAM contract prices in free fall, according to DRAMeXchange, Micron's dire guidance may not be dire enough.
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What happened last time
Micron's first quarter was strong, with double-digit growth in both revenue and earnings. But it marked the top of the cycle.
Micron's guidance for the second quarter calls for steep declines in both revenue and earnings. The company expects to produce revenue between $5.7 billion and $6.3 billion and non-GAAP EPS between $1.65 and $1.85. The midpoints of those ranges represent year-over-year declines of 18% and 38%, respectively.
A lot of things are going wrong at once. The smartphone market is slumping as consumers hold onto their phones for longer; a shortage of certain Intel CPUs is hurting demand for PC memory chips; a slowdown in data center demand, particularly in China, is causing pain; and weak demand for graphics cards following the bursting of the cryptocurrency bubble has reduced demand for graphics memory.
What analysts are expecting
On average, analysts are anticipating Micron's second-quarter results to be toward the low end of its guidance ranges.
Analysts have generally become more negative on Micron this year:
- Feb. 8: Goldman Sachs cuts its estimate for Micron's calendar year 2019 earnings, citing weak memory pricing.
- Feb. 11: Morgan Stanley calls a second-half recovery in DRAM chips highly unlikely.
- March 6: Cleveland Research reduces its 2019 revenue estimate for Micron due to higher competition, weak demand, and customer inventory consumption.
- March 13: Wells Fargo cuts revenue and earnings estimates for Micron through 2021 due to DRAM pricing issues. Still sees long-term secular demand drivers as intact.
- March 15: Bank of America Merrill Lynch reduces earnings estimates through 2021. Cross Research cuts earnings estimates through 2020, and it doesn't see earnings growth for another four quarters.
Expect a rough outlook
Micron has talked about a recovery in the second half of this year, but given how rapidly DRAM prices are falling, that may be overly optimistic. The company's fiscal third-quarter guidance won't be pretty -- analysts are expecting even steeper revenue and earnings declines on a year-over-year basis.
Beyond near-term guidance, what Micron's management says about the memory chip markets over the next few quarters will likely be what moves the stock. If Micron comes out and says a second-half recovery is still in the cards, that may be enough to keep the recent stock rally going. But if the company drops that language, or if it warns about a longer-than-expected downturn, recent gains could disappear in a heartbeat.
This isn't going to be a fun earnings report for Micron investors. But just as the cycle turned downward and put an end to Micron's record results, the cycle will eventually turn upward again. Exactly when that happens is anyone's guess.
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