Micron Technology (MU +6.38%), the world's third-largest manufacturer of DRAM and NAND memory chips, is a battleground stock for bulls and bears.
Micron's bulls believe that the chipmaker's stock will recover as memory prices stabilize and rebound. Its bears believe memory prices will stay low for the foreseeable future and that the trade war between the U.S. and China will prolong the pain.
When making these determinations, many of the stock's potential investors are gazing just one or two quarters ahead. But with cyclical stocks like Micron, it's better to take a longer-term view.
Image source: Micron.
When will memory prices rebound?
DRAM and NAND prices started rising in the second half of 2016 as supplies tightened. However, prices peaked in the second half of 2018 thanks to an oversupply of chips and softer demand from the commercial and consumer markets. As a result, Micron's sales decelerated sharply.
|
Metric |
Fiscal Q3 2018 |
Fiscal Q4 2018 |
Fiscal Q1 2019 |
Fiscal Q2 2019 |
Fiscal Q3 2019 |
|---|---|---|---|---|---|
|
Revenue |
$7.8 billion |
$8.4 billion |
$7.9 billion |
$5.8 billion |
$4.8 billion |
|
YOY Change |
40% |
38% |
16% |
(21%) |
(39%) |
YOY = Year-over-year. Source: Micron quarterly reports.
For its fiscal fourth quarter, which ends Aug. 30, Micron expects its revenue to fall 47% year over year to $4.5 billion with an adjusted gross margin of just 29% -- down from 39% in fiscal Q3 and 50% from fiscal Q2. Analysts expect Micron's full-year revenue to decline 24% and for its earnings to drop 48%.
Micron's management -- as well as most analysts -- expects DRAM and NAND prices to bottom out in late 2019 and rebound next year. In the meantime, the company is cutting its planned capital expenditures for 2019 and 2020, and plowing more cash ($2.7 billion in the first nine months of 2019) into share buybacks until market conditions improve.
China could torpedo Micron's recovery
Micron's path to a recovery seems straightforward, but several headwinds could blow it off course. First, the company generated 57% of its sales from China last year, and the evolution of the trade war into a tech war could lead more Chinese customers to turn to its Korean rivals Samsung (NASDAQOTH: SSNLF) or SK Hynix (NASDAQOTH: HXSCL) instead.
Image source: Getty Images.
Furthermore, Chinese chipmakers recently revealed their first homegrown NAND and DRAM chips. These cheaper chips could eventually flood the market and cause prices to stay low for years -- which would cripple Micron's long-term prospects.
Meanwhile, the escalating trade war could also make Micron an easy target for Chinese blacklists and regulatory pressure. Beijing regulators already launched antitrust probes against Micron, Samsung, and SK Hynix last year, supporting the notion that China wants to eliminate its dependence on foreign technologies. That shift could cost Micron some of its sales to embattled Huawei, which accounted for 13% of its revenues in the first nine months of fiscal 2019.
What should investors expect in the coming year?
Micron shareholders should keep a close eye on several factors in the coming months. First, they will want to see if the Trump administration's recent decision to partially relax its ban on sales of products to Huawei (presumably as a bargaining chip) actually sticks.
If his decision does result in some exemptions being granted to U.S. companies, Micron's DRAM business could warm up sequentially. In fiscal Q3, Micron noted that its DRAM shipments would have risen quarter-over-quarter if it hadn't been blocked from selling chips to Huawei. NAND bit shipments would also have been higher.
Investors should also keep a close eye on Chinese chipmakers like DRAM specialist Changxin and NAND maker Yangtze. If these companies aggressively ramp up their outputs, the current forecasts for a rebound in DRAM and NAND prices in 2020 could prove far too optimistic. There's also the risk that Samsung, SK Hynix, and other leading memory chipmakers could ramp up their production levels in an attempt to capture market share with cheaper chips.
Lastly, investors should monitor the data center, PC, and smartphone markets -- all of which lost momentum over the past year, throttling memory chip sales.
Two specific factors might propel a recovery in those arenas: first, if Intel (INTC +4.30%) is able to resolve its ongoing chip shortage, which could boost sales of PCs; and second, if new smartphone models resonate with consumers.
The key takeaways
Wall Street analysts expect Micron's revenue to fall 14% in fiscal 2020 (which starts on Aug. 31) as its earnings tumble another 59%. Those gloomy forecasts indicate that investors shouldn't expect Micron's sales to begin growing again anytime soon. The stock, which trades at 16 times forward earnings, also isn't cheap relative to that outlook.
Therefore, I expect Micron's stock to tread water over the next year. Given the potential headwinds and the levels of uncertainty surrounding the company, the shares are unlikely to rally, but bottom-fishing investors and aggressive buybacks should put a floor under the stock price.
