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Will Low DRAM and NAND Pricing Hamper Micron's Q1 Earnings?

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Micron Technology Inc.'s (MU - Free Report) heavy dependence on DRAM and NAND pricing has made the stock highly volatile in recent times.

Notably, the decline in DRAM and NAND pricing due to oversupply and lower-than-expected growth in end-market demand remains an overhang on Micron. The question lingering in investors’ minds now is what impact it will have on Micron as it reports first-quarter fiscal 2019 results on Dec 18.

Shares of Micron have shed 14.8% of its value year to date, comparing unfavorably with the S&P 500 index’s 0.8% dip.

 

Click here to see how the company’s overall Q1 performance is likely to be.

Reliance on DRAM and NAND to Decide Fate

Micron offers both DRAM and NAND products. While DRAM chips are key components in PCs, NAND flash chips are crucial for portable electronic devices. Micron had been the key beneficiary of the upswing in DRAM prices and strong demand triggered in the second half of calendar-year 2016.

However, according to DRAMeXchange, a division of TrendForce, DRAM products have begun to see a weak price trend, showing only a 1-2% sequential rise in contract prices for the third calendar quarter. The firm anticipates DRAM pricing to fall by more than 5% sequentially, in the ongoing quarter.

Meanwhile, NAND Flash pricing fell 10% in the third quarter of the calendar-year 2018. Moreover, considering the impacts of trade war, a 10-15% decrease is expected in the calendar fourth quarter.

Inventory adjustment across certain customers particularly in enterprise, cloud and graphics coupled with CPU shortages poses a key challenge to Micron.

Management noted that the inventory adjustment is impacting near-term demand of customers. This compelled management to predict the revenues of fiscal first quarter to be align with the lower end of the prior outlook.

However, the need for effective storage facility has been growing rapidly with the immense volume of data generated through smartphones and Internet-connected devices along with the increasing adoption of artificial intelligence (AI), machine learning and cloud computing.

In the last reported quarter, we note that although average selling price (ASP) of DRAM remained flat sequentially, mid- to upper-single digit percentage rise in shipment quantities boosted DRAM revenues. Meanwhile, NAND ASP declined in the mid-teens percentage range whereas revenue growth was marked by an increase in shipment quantities within the mid-30s range.

Therefore, it remains to be seen as to what extent the low pricing will affect Micron's revenues in the soon-to-be reported quarter.

Zacks Rank and Stocks to Consider

Micron currently has a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader Computer and Technology sector are CACI International (CACI - Free Report) , Intel (INTC - Free Report) and Symantec Corp. , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for CACI, Intel and Symantec is projected at 10%, 8.42% and 7.9%, respectively.

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