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Will Falling Chip Prices Thwart Micron's (MU) Q2 Earnings?

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Micron Technology Inc.'s (MU - Free Report) second-quarter fiscal 2019 results are scheduled to be released on Mar 20. The company’s performance is likely to bear the brunt of the declining DRAM and NAND pricing.

Micron’s heavy dependence on DRAM and NAND pricing has made the stock highly volatile in recent times. Notably, oversupply and lower-than-expected end-market demand are inducing a persistent decline in DRAM and NAND pricing, which remains an overhang on Micron.

Shares of Micron have shed 34.2% of its value in the past year versus the S&P 500 index’s 4.4% rally.

Click here to see how the company’s overall Q2 performance is likely to be.

DRAM and NAND Hold the Key

Micron offers both DRAM and NAND products. While DRAM chips are key components of PCs and servers, NAND flash chips are crucial to smartphones and solid-state hard drives.

Micron had been the key beneficiary of the upswing in DRAM prices and strong demand triggered during the second half of the calendar year 2016. However, diminishing memory prices in the recent quarters caused a slowdown in its revenue growth.

In the last reported quarter, revenues from DRAM products, accounting for 68% of the total revenues, were up 18% year over year but declined 9% sequentially. The company recorded flat shipment quantities sequentially while average selling price (ASP) dropped in the high-single-digit percentage range.

On the last earnings call, management lowered its expectation for growth of DRAM bit demand to around 16% in 2019 from 20% predicted earlier. Moreover, Micron anticipates DRAM bit shipments for the fiscal second quarter to decrease sequentially and be flat to down on a year-over-year basis.

Per latest reports by DRAMeXchange, a division of TrendForce, PC DRAM market witnessed the sharpest decline in prices within eight years, falling by around 30% in the first quarter of the calendar year 2019. This forced analysts to cut their earnings estimate for the company ahead of its reporting.

The Zacks Consensus Estimate for DRAM revenues is currently pegged at $4.03 billion, indicating a deterioration of 25% from the previous quarter.

Moreover, with oversupply in the market, NAND flash pricing has been dwindling since 2018.  Contract prices for NAND flash devices were anticipated to descend by about 10% in the fiscal first quarter and follow this downward trend through the fiscal second quarter.

Taking into account client compute CPU shortages and waning high end smartphone unit demand, Micron on the last conference call trimmed its projection for the industry’s NAND bit growth in 2019 to around 35% from the former forecast of 35-45%.

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

Zacks Rank & Stocks to Consider

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

A few better-ranked stocks in the broader technology sector are CommVault Systems, Inc. (CVLT - Free Report) , eGain Corporation (EGAN - Free Report) and Fortinet Inc. (FTNT - Free Report) , each 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 CommVault, eGain and Fortinet is projected at 15.8%, 30% and 16.8%, respectively.

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