Shares of Micron Technology (MU - Free Report) decreased more than 3% to close at $30.32 on Dec 21. Moreover, during the trading session, shares slipped to a 52-week low of $30.11.
This downside can be attributed to the company’s recently reported first-quarter fiscal 2019 results wherein earnings exceeded expectations but revenues missed the same. Moreover, inventory adjustments with several key customers compelled the company to issue a soft guidance for fiscal second quarter, which is an overhang on the stock.
Shares of Micron have shed 26.3% of its value year to date, comparing unfavorably with the S&P 500 index’s 9.7% drop.
What’s Hurting the Stock?
Micron is hit by excess inventory with customers in the cloud, graphics and enterprise market. Fall in demand from key customers like Intel (INTC - Free Report) and NVIDIA (NVDA - Free Report) is a major headwind for the company.
Intel’s CPU shortage coupled with weak demand for high-end smartphones is dragging down demand for NAND solutions. The company expects revenues in the graphics and datacenter market to be adversely impacted during a couple of more quarters by higher-than-normal inventories in gaming cards and the decline in cryptocurrency-related demand.
Such a scenario forced the company to lower its outlook for industry demand and supply of DRAM and NAND solutions and also announced a cut in its capital expenditure.
The company has trimmed its projection for NAND bit growth and reduced capital expenditure on NAND as it expects NAND industry supply growth to exceed industry demand in 2019.
Moreover, the U.S.-China trade war has made the demand environment highly uncertain for Micron.
Is There a Silver Lining?
However, management anticipates memory chip demand to improve during the second half of 2019 on the back of a bleak DRAM supply, lower customer inventory and stronger demand from customers.
The company believes that growing demand for new camera and digital features and the increasing application of artificial intelligence will drive content in mobile devices. Robust demand for higher density DRAM products across the data center market is a boon while rising demand for in-vehicle infotainment and advanced driver assistance systems will steadily fuel growth in the automotive market.
Additionally, the company plans to manage operating expenses by implementing controls on headcount, slowdown in holiday work schedule and discretionary spending reduction.
Although declining NAND and DRAM pricing is a threat to the company’s gross margin, Micron’s focus on improvement in cost structure and raising the mix of high-value solutions in its portfolio makes us positive.
Notably, in the last reported quarter, the company’s strong high-value solutions, driven by managed NAND products, helped it maintain overall NAND gross margins above 45% despite an oversupply in the industry.
Zacks Rank and Stock to Consider
Currently, Micron has a Zacks Rank #5 (Strong Sell).
A better-ranked stock in the broader Computer and Technology sector is CACI International (CACI - Free Report) , 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 is projected at 10%.
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