Kai Pfaffenbach | Reuters
Wall Street is expecting a rough quarter for beleaguered memory chip maker Micron Technology, which reports earnings Wednesday after the bell. The only question for most analysts is, How bad is it really going to be? Many analysts say the company's issues can be traced directly to the decline in memory prices.
The stock is up 29 percent over the last three months but analysts remain skeptical the rally will last. Shares are actually down 32 percent going back 12 months. Ironically, chipmakers are on pace for their best first quarter ever.
"Expect a tough quarter," said Morgan Stanley's Joseph Moore in an earnings preview note. There are indications that expectations for a second half recovery "are too optimistic."
"We expect MU earnings to reflect the weakness we have seen in the market since the company guided in mid-December, and we are frankly surprised that the company did not pre-announce," Moore said.
'DRAM Crash'
Citi's Christopher Danley told clients in a note that results are expected to be in-line with guidance but he sees downside to 2019 and 2020 estimates "due to the DRAM Crash," a reference to the drop in price for memory chips. He also said earnings per share are expected to drop in the second half of this year.
"In our conversations with investors, the Bulls think we are at or approaching the bottom and that a recovery will happen in 2H19," he said. "We disagree with this thesis based on our channel checks and our supply demand model." He said average selling prices for memory chips could bottom out in the second half of the year, not the first.
Cowen's Karl Ackerman said he expects guidance to be lowered. "Investor sentiment is dreadful going into the company's print this Wednesday."
Analysts at BMO upgraded the stock in January saying "while fundamentals will likely get worse before they get better, we believe the shares have bottomed out." The firm is sticking by that call, but in an earnings preview note to clients it added, "Yes, memory fundamentals have deteriorated.... And when we upgraded the shares as the year started, we said we expected conditions to get worse before they got better.... DRAM contract pricing took a step down in January and will continue to go down."
One analyst did have a slightly more bullish take. MKM Partners analyst Ruben Roy said that despite lower pricing and gross margin assumptions, "We continue to forecast solid operating margins and profitability for MU in 2019." Roy kept his price target at $44 and recommended investors stick with the stock for "a longer-term time horizon."
Here's what else the analysts think:
Morgan Stanley- Equal weight rating
"Expect a tough quarter, with indications that expectations for a 2h recovery are too optimistic. We expect MU earnings to reflect the weakness we have seen in the market since the company guided in mid-December, and we are frankly surprised that the company did not pre-announce... The more substantial question in our view is not how bad things can get in the short term (which is more of a focus of the bears), but rather how long conditions will continue to deteriorate (with a 2h recovery central to the bull case)... We don't expect to get definitive answers on that this quarter, but we continue to see discouraging lead indicators..."
Citi- Neutral rating
"We expect results to be in line with guidance but see downside to C19 and C20 estimates due to the DRAM Crash and expect EPS to decline in 2H19.... Our C20 EPS estimate is 34% below Consensus...2H19 is the bottom, not the recovery.... In our conversations with investors, the Bulls think we are at or approaching the bottom and that a recovery will happen in 2H19... We disagree with this thesis based on our channel checks and our supply demand model as we believe memory ASPs could bottom in 2H19, not 1H19... Still too much inventory... All three DRAM producers are stockpiling inventory in order to prevent flooding the market with excess of supply... We believe that current production rates remain well ahead of demand and the excess inventory on the balance sheets of the memory companies will need to be written down or written off... We estimate that normal DRAM channel inventory is one month and it's at three months now only due to producers holding inventory..."
BMO- Outperform rating
"Bottom in share price is likely behind us, we do not see negative FCF, and we see book value/share going up... All this in spite of pretty bad fundamentals in memory, particularly in DRAM... We now have BV/share exiting 2019 at $33 vs. $34 (prior) and are not changing our target price of $50, which is based on our analysis of normalized earnings.... Yes, memory fundamentals have deteriorated.... And when we upgraded the shares as the year started, we said we expected conditions to get worse before they got better.... DRAM contract pricing took a step down in January and will continue to go down... We are now modeling for the lowest point in y/y deceleration in DRAM pricing to occur in F4Q (similar to before) but lower at a y/y change of down 45% vs. 37%... We expect that to likely mark the bottom in fundamentals.
Bank of America- Buy rating
"Like other Asian memory chipmakers such as Samsung and Hynix, Micron's Feb-end 2Q FY19 results will be lower than consensus, in our view.. New guidance for 3Q (May-end) is also expected to remain conservative as decent bit growth (sales volume increase QoQ) could be offset by further price cuts... Meaningful earnings recovery should start in Aug-end 4Q on the back of new chip demand (mostly for datacenters and new smartphones) after channel inventory normalization in 1H CY19..."
Deutsche Bank- Buy rating
"We expect the company to report F2Q results around the low end of guidance as both DRAM and NAND pricing appear to be worse than expected....We also expect F3Q guidance to be below consensus driven by continued weakness in DRAM pricing, and we believe some investors are already expecting EPS to reach $0.80-$1.00, below current DBe and consensus estimates... While there are some downside risks to results and guide, we believe many investors are overlooking short-term headwinds and are more focused on the timing and magnitude of a 2H19 memory rebound... We continue to believe EPS will trough in the May-19 quarter, and the combination of supply cuts and demand recovery should drive earnings improvements and inventory normalization in 2H19, which in turn could drive multiple expansion..."
MKM Partners- Buy rating
"While we remain bullish on longer-term secular changes in the memory industry, we are lowering our estimates for MU's February quarter earnings report which is scheduled on Wednesday, March 20 after the market close... While industry data points indicate that demand trends in the server and handset markets remain challenged, DRAM pricing deterioration over the past several months appears well understood, in our view.... On the NAND side, we believe that some signs that point to some stabilization ahead have begun to emerge.... Despite our lower ASP assumptions and lower gross margin assumptions, we continue to forecast solid operating margins and profitability for MU in 2019... We continue to recommend MU shares for investors with a longer-term time horizon and our 12-month price target remains at $44..."
Susquehanna- Neutral rating
"As we prepare for MU's earnings, we argue the Street is already aware of worse-than expected ASP declines in 1H19, followed by a moderation in the rate of declines into 2H19... But, what is not well understood and not dialed into the share price is GM trends given the flattening of the cost curve, elevated inventories and lack visibility on mix impact from the higher margin segments.... There have certainly been (positive) structural changes within the memory industry (i.e. consolidation, increased Enterprise/Cloud demand)... But, we also argue cost curves for both DRAM and NAND have moderated (as capital intensity increased) while there is nearly a full quarter of inventory (on manufacturers' books)... We also argue 2019 cap-ex cuts are not yet deep enough to lead to shortages by YE19, and ASP increases in 2020..."
Cowen- Outperform rating
"Investor sentiment is dreadful going into the company's print this Wednesday, and a guide down is already expected... We think the primary focal point investors will anchor their investment thesis on is the degree of evidence on the call for a 2H demand recovery. ..We are reducing our C2019 estimates but are maintaining our Outperform and $40 target..."
