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Morningstar | Micron Results Increase Optimism of 2H Recovery; Maintaining $40 FVE

Micron’s fiscal third-quarter results showed signs of improvement, with revenue and earnings performing in line with guidance against a weak market environment and fears that those conditions might be prolonged. Management reiterated plans to cut capital expenditure for fiscal 2019, after previously lowering the full-year target to $9 billion, and committed to continue cutting investments in 2020. Shares jumped 8% in after-hours on the solid results and management’s relatively optimistic outlook. Management’s efforts have shown progress to more effectively match output with demand but we reiterate our no-moat rating and fair value estimate of $40. While shares remain slightly undervalued, in our view, we reiterate our very high uncertainty rating and do not see a sufficient margin of safety at current prices.

Revenue in the quarter declined by 18% sequentially to $4.8 billion, which represented a nearly 39% fall year over year. DRAM revenue fell by 19% sequentially as bit shipments were flat and prices declined by 20%. Sales for NAND declined by 18% from the second quarter with ASPs declining in the midteens over the same period. Gross margins in the quarter came in at 39%, well-below the 50% in the second quarter as a result of poor pricing for both DRAM and NAND, underutilization charges with IMFT, and some impact from U.S. tariffs on China. U.S. and China relations remains an area of uncertainty, specifically the Huawei ban, which was a headwind for both DRAM and NAND sales during the quarter. However, Micron disclosed that while initially stopping all shipments to the Chinese firm, after a thorough review, it determined that it could “lawfully resume shipping a subset of current products” and had done so during the two weeks prior to the earnings announcement. Despite some limited relief, trade relations between the two countries remain an ongoing concern and management was coy around providing any concrete forecasts on the impact of tariffs.

While management saw signs of improvement for DRAM in particularly going into the fourth quarter, the NAND recovery remains more muted though management reiterated its outlook for stabilization in the second half of calendar 2019. Micron will need to increase its inventory levels for NAND to handle the expected uptick in demand in the upcoming fiscal year which comes as the firm handles further technology transitions into 128-layer 3D NAND. Finally, while management provided few details around the size of the capital expenditure cut with further commentary expected in the upcoming quarter, they were explicit that the cuts would be meaningful and that it would impact both NAND and DRAM.