EUR 850.00 For Business Accounts Only

Morningstar | Warning Signs Begin to Cloud Micron's Rosy Forecast; Shares Approaching Unchanged FVE of $40

Micron reported strong fiscal fourth-quarter results driven by favorable industry fundamentals. However, a bevy of warning signs illuminate short-term headwinds that we expect to decelerate its recent torrid growth streak and gaudy margin expansion. Management cited customer-specific inventory adjustments, the recently announced $200 billion in tariffs on imports from China, and CPU shortages as notable detriments to first-quarter guidance. Shares fell about 7% during afterhours trading and are nearing our unchanged $40 fair value estimate. We continue to recommend that prospective investors wait for a wider margin of safety in no-moat Micron.

Fourth-quarter revenue grew to $8.44 billion, up 38% year over year, led by record server DRAM and SSD sales. The compute and networking business unit was led by cloud and graphics DRAM, which nearly doubled year over year. DRAM sales rose 47% year over year to $5.9 billion. However, average sales prices in DRAM were relatively flat sequentially, consistent with our outlook for second-half 2018. NAND sales rose 15% sequentially and 21% year over year to $2.2 billion, thanks to SSD strength. Gross margins rose to 61.0% from 60.6% last quarter, as strong bit growth and cost declines were offset by flat average selling prices in DRAM and lower ASPs in NAND. In fiscal 2018, revenue grew 50% to $30.4 billion due to stellar DRAM growth, while over a third of total sales came from the data center and graphics markets.

Fiscal first-quarter sales are expected to be at a midpoint of $8.1 billion, implying a sequential decline of 4%. DRAM prices are poised to decline in the near term, in our view, with firms such as Micron offsetting this trend by increasing output via technology transitions. Management noted the firm is on track to achieve total production output crossover during the fiscal first quarter for its 1X-nanometer DRAM, with meaningful production of the next-generation 1Y-nm DRAM starting in third-quarter fiscal 2019.

Fiscal 2019 capital expenditures are expected to be at $10.5 billion, with investments focused on closing the DRAM technology gap with Samsung and SK Hynix while maintaining flat wafer capacity. While this bodes well for supply/demand dynamics, with other peers also projecting no major capacity additions, we are concerned with the aforementioned headwinds (tariffs, CPU shortages, and customer-specific excess inventory). It will take three to four quarters for Micron to mitigate the impact from the tariffs. Another noteworthy consideration is that beginning in the fiscal first quarter, Micron will no longer disclose gross margins by DRAM and NAND product categories. We believe this will increase the opacity of the the cost and pricing dynamics of DRAM and NAND, with the lack of granularity going forward potentially signaling that tough times are to come.