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Bear of the Day: Micron (MU)

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Micron (MU - Free Report) has fallen back into the cellar of the Zacks Rank, despite top and bottom line beats for the company's Q3 FY19 (ended May). 
Micron reported non-GAAP earnings per share of $1.05, which surpassed the Zacks Consensus Estimate of 75-cents, yet were dramatically lower than the year-ago quarter’s figure of $3.15.
Micron’s revenues of $4.8 billion exceeded the Zacks Consensus Estimate of $4.66 billion but dropped around 33% on a year-over-year basis.
Industry oversupply and higher-than-expected decline in DRAM and NAND pricing remain concerns. Moreover, restriction on sales to Huawei negatively impacted its DRAM and NAND revenues.
Although the company is reporting a drastic year-over-year fall in revenues and earnings, its better-than-expected third-quarter fiscal 2019 results coupled with an improved outlook for DRAM were positives that vaulted shares last week 16% from under $33 up to $39.
Mixed Guidance in a Troubled Global Tech Sector
With progress in customer inventory adjustments in most of its end-markets, the company expects bit demand for DRAM to return to healthy year-over-year growth in the second half of 2019. Micron anticipates a strong uptick in DRAM bit shipments for the cloud, graphics and PC markets during the fiscal fourth quarter and thereafter.
And yet analysts took their full year FY2020 EPS estimates (starting in September) down 23% from $3.62 to $2.78. And this latest move followed a massive hair-cut from $4.81 in the past 90 days, which is what initially put MU into the Zacks #5 Rank cellar.
Here were the revenue trends that analysts were likely focused on...
DRAM revenues of $3 billion, accounting for 64% of total revenues in the quarter, plunged 45% year over year and 19%, sequentially. Sequentially, average selling price (ASP) of DRAM approached 20% while shipment quantities were flat. Bit shipments in DRAM were adversely impacted by the Huawei ban.
NAND revenues of $1.5 billion, representing 31% of the total top line, were down 25% on a year-over-year basis and 18% quarter over quarter. While NAND ASP decreased in the mid-teen’s percentage band, shipment quantities contracted in the mid-single digit range sequentially.
The timing of demand from a large customer benefited NAND bit shipments. When adjusted for Huawei, bit shipments came in better than the company’s prediction owing to solid component sales. High-value solutions contribute to more than two-thirds of NAND revenues.
Unit-wise, revenues of the computing and networking business (CNBU) unit deteriorated 48% from the year-ago quarter and 13% sequentially to $2.1 billion. Weak pricing across major market segments remained a headwind. However, normalized customer inventory levels — particularly in graphics and client — expanded shipment volume in the quarter.
Revenues from the Mobile Business Unit (MBU) of $1.2 billion declined 33% on a year-over-year basis and 27% sequentially due to lower shipments to Huawei. Adverse pricing and DRAM volume were dampeners. Nonetheless, sturdy growth in managed NAND products led to a skyrocketing 200% increase in bit shipments.
The Embedded Business Unit revenues logged $700 million, down 22% from the year-ago quarter and 11% from the previous quarter due to softer pricing, inventory adjustments in the consumer segment and macroeconomic downturns.
Revenues from the Storage Business Unit (SBU) comprising SSD NAND components and 3D XPoint totaled $813 million, down 29% on a year-over-year basis and 20% sequentially due to competitive pricing. Moreover, large one-time sale that the company undertook in the year-ago quarter induced a tough year-over-year comparison on component volumes.
Micron as Barometer of Global Tech
How fitting is it for this precision chip maker to be such a bellwether for the global Semiconductor apparatus.
The question on every Tech/Semi investor's mind is "How close are we to the bottom of this pessimism?"
Micron shares recently put on a clinic for bears in why you don't get paid to short this stalwart of the modern technology super cycle that powers everything from simple memory hardware functions to the most advanced AI applications in deep learning and autonomous driving.
But Wall Street i-bank analysts still lowered estimates drastically for next year as if they picture a major global recession on the horizon due to China trade war and Huawei issues.
Bottom line: While the short-sellers got a rude lesson in selling the number one memory maker at such value levels, we don't yet know if we've seen the bottom in the Tech Super Cycle. That means lower projections from analysts could be in store. Until we have more estimates, it's time to stand aside. The Zacks Rank will let you know.
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