Micron Technology, Inc. (MU) stock took a pounding the day after the company posted weak fiscal-third-quarter earnings, down over 10%.
Micron reported revenue of $2.9 billion for the quarter, a massive 24.7% year-over-year decline and $60 million below the consensus on Wall Street.
Sales at the chipmaker have been in decline over the past seven quarters, though the last quarter was more brutal than most. Although the company managed to eke out a penny beat after posting non-GAAP EPS of -8 cents vs. an expected loss of 9 cents, GAAP net loss of $215 million compared very poorly to the year-ago quarter, when the company posted net income of $491 million.
Shrinking Margins for Micron
So Micron stock is now in a severe conundrum where both its top and bottom lines are contracting in double-digits.
Investors are, however, typically more concerned about Micron’s margin trends because they correlate strongly with the demand/supply forces in the market.
Micron sells two main types of memory products: DRAM and NAND. DRAM is a type of memory found predominantly in PCs and mobile devices. DRAM is faster than NAND but is volatile — i.e. data is lost when the device is powered off.
NAND, on the other hand, is a type of memory found solid-state drives (SSDs), USBs and memory cards. Unlike DRAM, NAND is non-volatile memory that is capable of retaining data even after a device loses power.
Micron is usually coy about revealing the actual average selling price for its products. Nevertheless, it’s not hard to figure that the company’s ASPs are trending south. After all, Micron reported that DRAM bit growth during the quarter clocked in at 22% yet revenue still fell sharply.
DRAM sales accounted for 60% of overall sales during the quarter, with NAND bringing in 31% and Other Products accounting for the balance. For revenue to have plunged so dramatically, it can only mean that DRAM, and possibly NAND, ASPs took another big hit.
Falling ASPs have taken a big bite off Micron stock and margins. Gross margin during the quarter was 17% vs. 31.2% a year ago while operating margin clocked in at -7.42% compared to 12.74% during last year’s corresponding quarter.
Unfortunately for Micron stock, both DRAM and NAND are highly commoditized, which makes it hard for the company to differentiate its products from those by its competitors. Consequently the company’s DRAM and NAND businesses tend to be highly cyclical and are dictated by swings in demand and supply. 2014 and the early part 2015 were good times for the company, and its profitability soared.
But the markets were soon flooded with too much DRAM, leading to a precipitous decline in prices during the latter half of 2015 and this year. Better factory yields by leading producers Samsung (SSNLF) and SK Hynix are responsible for this state of affairs, as is the refusal by smaller Asian manufacturers to trim supply as they look to maintain market share.
Throw in weak demand due to an anemic PC market that has refused to recover and Micron stock is finding itself wedged between a rock and hard place.
The DRAM oversupply is expected to continue till early 2017 before things start looking up.
Product Transitions and Cost Cutting Might Do the Trick
Micron, though, still believes that it can manage to overcome the vagaries of a weak market through its ongoing product transitions. The company is moving from older 25-nanometer and 30nm DRAM to the newer 20nm, which is in higher demand. Micron indicated that it had already achieved 50% crossover success during the last quarter.
Further, Micron added that the transition from planar NAND to 3D NAND was exceeding the company’s expectations. Micron is ahead of many of its peers in the transition to 3D NAND and might be among the first companies to benefit when demand takes off.
Meanwhile, Micron’s 3D XPoint, that it jointly developed with Intel Corporation (INTC), remains a wildcard but with good potential to drive future growth for the company. 3D XPoint is a non-volatile memory just like NAND but is much faster and more durable than NAND. The product can either replace DRAM, NAND, or be used as a middle layer between the two.
The potential applications of the new architecture are numerous, and Micron CEO Mike Durcan expects the product to bring in as much as $5 billion for the company in 2018, or about half the company’s DRAM revenue at the time.
Over the short-to-medium term, the fortunes of MU stock are likely to be largely dictated by margin improvements. Micron is likely to achieve this through a mixture of global job cuts and lowering in 3D NAND manufacturing costs. Micron expects to realize cost savings of $300 million in 2017, which could give a nice boost to its battered bottom line.
Meanwhile, Micron stock has surged as much as 6% over the past five days after HDD manufacturers Silicon Motion Technology Corp. (ADR) (SIMO), Western Digital Corp (WDC) and Seagate Technology PLC (STX) issued upbeat guidance. Although it’s still too early for memory investors to do a victory lap, the fact that that WDC and STX — the two largest players in the industry — are involved here is a positive sign.
Maybe we, after all, are beginning to see the early innings of the much-touted PC recovery.
And Micron stock is likely to shake off the effects of its latest earnings wipeout, and looks like a good long-term bet from here.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
