There was nothing to like about Micron Technology's (NASDAQ: MU) second-quarter fiscal 2019 earnings report. The chipmaker's revenue and earnings crashed year over year, and its guidance didn't pass muster. Nevertheless, investors bid the stock up as they saw a silver lining.
The memory specialist expects an uptick in demand in the second half of the calendar year, even as it moves to restrict its dynamic random access memory (DRAM) and NAND flash output to help reduce the industry oversupply. But is this a good enough reason for investors to buy Micron stock?
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What Micron says
Micron management made a frank admission during the Q2 earnings call that end-market conditions are challenging, which is why the company will further reduce its capital expenditures this year. But the company believes that its fortunes will start turning around in the next couple of quarters. CFO Dave Zinsner said, "We expect our DRAM bit shipments to grow sequentially during the fiscal third quarter and at much higher rates in the fiscal fourth quarter. In NAND, we expect a modest sequential decline in our bit shipments in the fiscal third quarter due to timing of shipments and expect growth to resume in the fiscal fourth quarter."
However, Zinsner added that "visibility remains low, and the near-term environment remains challenging," so investors shouldn't count on a quick return to growth in shipments. And even if shipments rise, that won't necessarily translate into higher revenue for Micron, given the state of affairs in the industry.
Micron's DRAM revenue fell 28% year over year and 30% sequentially during the second quarter, driven primarily by a 20% sequential decline in its average selling price (ASP). Similarly, NAND flash revenue fell 18% sequentially due to a 25% drop in its ASP, even as bit shipment growth increased by a high single-digit percentage.
So shipments are not the problem for Micron -- pricing is. That's why the company has decided to take matters into its own hands by reducing its fiscal 2019 capex budget to approximately $9 billion from the prior range of $9 billion to $9.5 billion, which means that it has slashed its spending forecast for the second quarter in a row. Micron is also reducing its capacity utilization by 5% for both DRAM and NAND.
Such a step by Micron and others in the memory industry could help boost prices, but demand would also need to pick up if oversupply is to come down. That's another variable that needs to improve if Micron is to make a comeback.
Don't expect a quick turnaround
The personal computer (PC) market has been hit by a shortage of components. PC sales fell last year because of this headwind, and the situation isn't expected to turn around anytime soon, as IDC estimates sales declines through 2023. Similarly, data center demand has been weak due to inventory adjustments, while demand for graphics cards has tumbled after the cryptocurrency catalyst fizzled out.
So the market forces of demand and supply will have to turn in Micron's favor for the company to turn around. Of course, the chipmaker expects the demand side of the equation to start falling in place over the next few quarters, but it remains to be seen how much of an impact the reduced capacity utilization will have on the existing inventory glut and weak pricing environment.
Semiconductor market research firm IC Insights forecasts that the memory market will slump 24% this year as the bust cycle continues. Micron's current quarter guidance is consistent with that outlook. The company expects revenue to crash 38% year over year during the third quarter, while earnings will plunge 73%.
So, investors shouldn't get excited about Micron just yet. It would be better to wait for concrete signs of a turnaround, as there could be more pain on the way if demand doesn't pick up and the inventory glut continues.
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