EUR 850.00 For Business Accounts Only

Morningstar | Micron Adroitly Traverses Rocky Industry Environment While Banking on 2H Recovery. See Updated Analyst Note from 20 Mar 2019

Micron reported fiscal second-quarter results consistent with the weaker market conditions faced by the majority of semiconductor firms. Softer demand and pricing declines across DRAM and NAND have forced Micron to take actions to limit the sharp uptick in inventories, including lower capital expenditures by $500 million and factory utilization by 5%. Management remained committed to the second-half recovery narrative it posited last quarter. Shares rose nearly 5% during after-hours trading and are hovering slightly above our unchanged fair value estimate of $40 per share for the memory supplier. While we applaud the firm’s efforts to bring its supply output more in line with demand, we would steer prospective investors more toward wide-moat Applied Materials in lieu of no-moat Micron.

Second-quarter revenue fell to $5.8 billion, down 26% sequentially due to a challenging industry environment. One bright spot was mobile revenue which grew 2.5% year-over-year thanks to stronger managed NAND sales despite weakness in high-end smartphone unit sales. Going forward, we remain optimistic on overall content gains, as flagship devices will feature higher storage capacities (1 terabyte) and more compute (12 gigabytes) for advanced capabilities such as artificial intelligence and superior cameras. Meanwhile, elevated inventories in data center and graphics end-markets, coupled with PC CPU shortages, led to lower revenue in compute networking and storage business units. That said, CEO Sanjay Mehrotra expects a return to normal inventory levels at cloud and graphics customers, in turn fueling growth in the second half of calendar 2019.

Gross margins fell 920 basis points from last quarter to 49.1%, partially due to a 160-basis-point impact from 3D XPoint underutilization costs. Ongoing pricing declines were the primary contributor to the decline, modestly offset by the firm’s ongoing cost reductions from technology transitions for 1Y-DRAM and 96-layer 3D NAND. Fiscal third-quarter sales are expected to be at a midpoint of $4.8 billion, which implies an 18% sequential decline. CFO David Zinsner said the firm will reduce its prior capital expenditure guidance to $9 billion (versus $10.5 billion two quarters ago) to align with the firm’s output targets.

Mehrotra anticipates DRAM bit demand growth in the low-to-mid teens versus industry bit supply growth in the mid-to-high teens and NAND bit demand growth in the mid-30s versus industry bit supply growth in the high-30s. To bring Micron’s output closer to demand growth, the firm will be idling 5% of DRAM wafer starts and reducing total NAND wafer starts by 5%. We view this move as prudent given the rising inventory levels ($4.4 billion at the end of the quarter versus $3.9 billion last quarter). Days of inventory on hand rose from 134 days to 107 days, and we expect the firm’s actions coupled with a second-half rebound to return Micron’s inventory to more reasonable levels. Nevertheless, the second-half rebound is not guaranteed, and thus we do not see a margin of safety in shares of very high uncertainty Micron.