Micron Technology Has a Lot to Prove Next Week

Image source: Micron Technology.

Investors will be expecting the first tangible signs of a turnaround from Micron Technology (NASDAQ: MU) when the company reports its fiscal fourth-quarter results after the market close on Oct. 4. The stock has soared about 60% since the beginning of May, driven by the hope that prices for DRAM and NAND memory chips are beginning to stabilize. Micron has reported a net loss in each of the past two quarters thanks to memory chip prices falling faster than the company could cut costs.

Micron expects to produce another net loss during the fourth quarter, although the company has become increasingly optimistic that the environment is improving. In a presentation earlier this month, Micron said that improving market conditions are expected to continue into next year. The company expects to achieve 20%-25% per-bit cost reductions for both DRAM and NAND in fiscal 2017, significant progress that should boost profitability, barring an even larger drop in prices.

Analysts expect Micron to produce revenue of $3.13 billion during the fourth quarter, down 13.2% year over year. Non-GAAP EPS is expected to be a loss of $0.13, compared to a profit of $0.37 during the prior-year period. Micron expects its full-year non-GAAP EPS to be positive despite another loss during the fourth quarter.

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All eyes on guidance

Expectations are high going into Micron's earnings report, not so much for the company's fourth-quarter results, but for guidance going forward. In order for the recent surge in the stock price to hold, Micron's profitability will need to begin improving. Analysts are expecting a return to non-GAAP profitability during the first quarter of fiscal 2017, along with a small year-over-year increase in revenue. If Micron fails to deliver guidance matching or exceeding those expectations, watch out below.

The recent optimistic remarks from management seem to be a strong sign that the situation is indeed improving, but management has been overly optimistic in the past. At the end of the fiscal fourth quarter of 2015, Micron stated in its earnings presentation that it expected the demand environment to stabilize in 2016, with balanced supply and demand for both DRAM and NAND. The actual result: not even close. DRAM per-bit selling prices plunged 33% through the first half of the year, and Micron's revenue and profitability fell off a cliff.

One area to watch is Micron's mobile segment, which began producing operating losses during the past two quarters. One reason for the weak performance has been delays in customer qualifications. Micron stated in the recent presentation that these key mobile customer qualifications are now complete, removing one significant headwind.

The compute and networking segment, which includes PC and server DRAM, is also something to watch. The market for PCs is still in decline, but Micron managed to produce sequential growth during the third quarter, driven by enterprise and graphics products. PC sales declined more slowly than expected during the second quarter, according to IDC, but weak sales will continue to hold the segment back.

Investors are expecting a lot from Micron when it reports its fourth-quarter results. The company will need to produce guidance that predicts meaningful improvement during the first quarter of fiscal 2017 in order to satisfy those demands. If Micron guides for another revenue decline and loss during the first quarter, optimism among investors may vanish, sending the stock tumbling. We'll know more on Oct. 4, when Micron unveils its latest results.

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Timothy Greenfree for 30 daysconsidering a diverse range of insightsdisclosure policy