What To Expect From Micron Tuesday - Micron Technology, Inc. (NASDAQ:MU)

Micron (MU) reports quarterly earnings Tuesday. Analysts expect revenue of $4.77 billion and EPS of $0.83. The revenue estimate implies a double-digit decline sequentially. Investors should focus on the following key items.

If Micron hits its revenue estimate, it would represent a sequential decline of about 18%. This would follow a 26% sequential decline last quarter. Micron's revenue appears to be in free fall and the slide could continue. The company's gross margin also fell by 900 basis points versus the year-earlier period. This caused gross profit to fall by double digits as well. Micron's declining scale could punish margins again this quarter.

Micron's big idea was to de-emphasize revenue from components for high-end solutions with higher growth prospects and higher margins. That worked while animal spirits were in play. However, rapid demand for memory chips may have waned. Last quarter, revenue from the Compute and Networking Business Unit ("CNBU") fell over 30% Y/Y. Inventory corrections and CPU shortages hurt the sector. CNBU represents just over 40% of total revenue and is the company's largest segment.

The Mobile Business Unit ("MBU") was the bright spot last quarter, with revenue rising 3% Y/Y. Its revenue fell 27% sequentially due to seasonality and waning demand for mobile devices. In its most recent quarter, Broadcom (AVGO) reported lower revenue from its Semiconductor Solutions segment, partially due to lower demand for wireless content in handsets. This could imply more headwinds for the mobile device industry across the board. Revenue for the Embedded Business Unit ("EBU") and Storage Business Unit ("SBU) fell by 4% and 19%, respectively. The EBU finally experienced weakness in the auto sector that I had been predicting for a while. The cyclical nature of autos puts EBU at further risk, in my opinion.

Whether or not Micron's free fall continues could be determined by its pricing power. On a product basis, DRAM revenue fell 28% Y/Y and 30% sequentially; average selling price ("ASP") fell in the low-20% range compared to the prior quarter. Some believe customers may have stockpiled products related to DRAM in order to lock in prices. If customers work through those stockpiles and demand picks up, then it could help DRAM ASP. DRAM represents over 60% of Micron's revenue.

NAND revenue fell 2% Y/Y and by double digits sequentially. NAND ASP also declined in the mid-20% range, but the price was slightly offset by increased shipments. An analyst from Baird believes DRAM and NAND inventories remain at abnormally high levels and the NAND downturn could stretch into 2020. This implies that the slide in ASP for NAND and/or DRAM could continue. Micron could reduce supply a bit, but it may not fully offset its loss of pricing power.

President Trump's attempts to monitor sales of technology components to Huawei has dominated the financial news cycle. The move could also hurt sales of Micron; I understand Huawei represents over 10% of Micron's total sales:

Analysts are slashing their earnings estimates and target prices for Micron Technology before the memory-chip maker reports earnings after the market closes on Tuesday, but they can't agree on what investors should do with the stock. One big problem is the blacklisting of Huawei Technologies by Washington. The move bars U.S. companies from doing business with the Chinese telecom company, which accounts for about 13% of sales at Micron.

A loss of Huawei equipment orders will likely sting in the second half of the year. Analysts and investors will likely speculate on when those orders will return. The trade war with China could last for a while. However, this could go beyond a trade war. Huawei could become a pawn in a battle for intellectual technology. Such a battle, combined with a global economy that may have peaked, could mean Huawei equipment orders may not return to previous levels.

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Source: Seekingalpha.com

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