Micron shows how the cloud is saving chip makers


Memory-chip maker Micron Technology Inc. was saved by a boom in data centers, adding to chip makers’ growth as the pandemic forces more companies to expand their cloud computing capabilities.

On Monday, Micron
MU,
+1.35%

reported better-than-expected fiscal second-quarter earnings and had a stronger outlook for the next quarter, despite some issues with the global supply chain due to the COVID-19 pandemic. Micron’s shares jumped nearly 6% in after-hours trading. At Monday’s close, Micron was trading at $49.15, down 8.62% for the year but a huge recovery from its plunge in March, when it hit a low of $31.13 in the early days of the pandemic.

“We continue to see healthy demand trend in cloud in the second half of the year,” Micron Chief Executive Sanjay Mehrotra told analysts on a conference call. “Cloud is still actually in early innings, and long-term trends for cloud are strong.” In the second quarter, the company said that the work-from-home economy, e-commerce and videogame streaming all drove a strong surge in demand for more cloud-computing capabilities.

Micron’s comments echo those that other chip giants, such as Intel Corp.
INTC,
+1.33%

and Nvidia Corp.
NVDA,
+0.49%

NVDA,
+0.49%
,
made last quarter. On Monday, Xilinx Inc.
XLNX,
+1.03%

joined the crowd when it updated its guidance for its fiscal first quarter, noting that strong performance in wireless and data center were offsetting weakness in consumer segments.

In the second half of the year, Micron said that it expects demand for consumer technology products such as PCs and smartphones to improve. That’s in part due to the ongoing rollout of 5G networks, which will drive demand of new smartphones that have more dynamic random access memory (DRAM) chips, compared to 4G-network phones. The company said that average selling prices of both DRAM chips and NAND flash memory were up sequentially from the previous quarter.

One issue hovering over the company, and indeed most chip makers, is the growing rise in inventories, both by Micron and its customers, especially in the smartphone market. When asked by an analyst about the growing inventories, Mehrotra said its customers are trying to prepare for when consumer demand returns.

“Customers want to be prepared to supply the smartphone demand” when it returns, he said. “So, overall, you know, it’s a mixed picture with respect to the inventory on the customer front. Cloud inventories are in decent shape,” while mobile inventories are “somewhat in anticipation of demand.”

NVDA,
+0.49%

The chip industry has been amazingly resilient during the coronavirus pandemic, and most of the demand is due to data centers and the demand for more cloud computing. If the PC and smartphone markets return to growth, there could be even more upside for chip makers such as Micron. But for now, the sure thing is centered around the data center.



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Micron earnings show spike in memory sales, forecast suggests more of the same


Micron Technology Inc. shares jumped in after-hours trading Monday after the memory-chip maker said sales surged in the third quarter and are expected to remain strong in the final period of its fiscal year amid the COVID-19 pandemic.

Micron
MU,
+1.35%

forecast adjusted fiscal fourth-quarter earnings of 95 cents to $1.15 a share on revenue of $5.75 billion to $6.25 billion, which would be a big gain from a year ago when the company reported earnings of 56 cents a share on revenue of $4.87 billion.

Analysts surveyed by FactSet, on average, were predicting fourth-quarter earnings of 79 cents a share on sales of $5.46 billion, according to FactSet.

Shares gained more than 5% in after-hours trading, following a 1.4% gain in the regular session to close at $49.15.

“As we look ahead at the second half, of course, you know, given the total COVID environment and uncertainties around COVID around the globe, we basically have limited visibility,” said Sanjay Mehrotra, Micron’s chief executive, on a conference call.

“Yet, we do believe that cloud demand in the second half of the calendar year will continue to be healthy for us,” Mehrotra said.

Micron specializes in DRAM and NAND memory chips. DRAM, or dynamic random access memory, is the type of memory commonly used in PCs and servers, while NAND chips are the flash memory chips used in USB drives and smaller devices, such as digital cameras. While the COVID-19 pandemic has been cited as fueling a boost in memory-chip sales, many analysts suspect that may have oversupplied the market, which could bode poorly for the second half of the year — but not according to Micron’s forecast.

The company reported fiscal third-quarter net income of $803 million, or 71 cents a share, compared with $840 million, or 74 cents a share, in the year-ago period. Adjusted earnings were 82 cents a share, compared with $1.05 a share in the year-ago period. Revenue rose to $5.44 billion from $4.79 billion in the year-ago quarter.

Analysts had forecast adjusted earnings of 75 cents a share on revenue of $5.27 billion.

Micron had already informed investors that it would outperform its original expectations. In late May, Micron forecast adjusted earnings of 75 cents to 80 cents a share and revenue of $5.2 billion to $5.4 billion, up from its forecast of 40 cents to 70 cents a share on revenue of $4.6 billion to $5.2 billion back in March.

For the year, Micron shares are off about 10%, while the PHLX Semiconductor Index
SOX,
+1.14%

SOX,
+1.14%

is up 4%. Meanwhile, the S&P 500 index
SPX,
+1.46%

is down 6%, and the tech-heavy Nasdaq Composite Index
COMP,
+1.19%

is up 9%.



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Western Digital Earnings Comments Good For Micron – Micron Technology, Inc. (NASDAQ:MU)


Western Digital (NYSE:WDC) put up strong results. WDC is more exposed to NAND while Micron (NASDAQ:MU) is one-third exposed to NAND. WDC cited strong industry dynamics helping their numbers improve. Similar trends should benefit Micron.

Recent History

We went to a Buy Rating from Neutral on WDC on Dec. 12 (paywall).

Source

Above you can see where we got more bullish. Here’s what we said at the time:

“With NAND pricing moving up I think this stock has bottomed. I think 5G and Apple moving along with pricing moving up and the stock near its lows is a great risk reward.

Really pricing is so important for memory exposed stocks. NAND pricing is now up after being down for a while. Let’s keep it simple, that’s good.

You saw me enter to WDC in our model portfolio. I want to go to a Buy Rating. It’s not as strong as a Strong Buy because I don’t have everything line up but I think this is something that can go.”

This story has been playing out. 5G and Apple are coming on along with other drivers I’ll talk about below. You saw me above get excited about pricing which you’ll see below was a core driver to their earnings taking the stock higher.

I do think short term it’s a little more fully valued but I think that medium term there’s still upside. I’ll explain.

Strong Memory Pricing

Western Digital had strong comments on pricing. Since memory companies are cyclical, pricing matters very much. In fact pricing is the single most important datapoint for me when doing work on WDC and Micron.

Here’s what Western Digital said on pricing:

“As we enter the March quarter, flash pricing continues to improve.”

“Relative to mix, I would say both product and market segment exposure and then of course the broader ASP pricing environment are going to be the drivers of the margin enhancement through the calendar year 2020.”

You hear them saying it here that the “pricing environment” is going to be a “margin enhancement” this year.

WDC is expecting a big margin turnaround now thanks to pricing.

Here’s their guide.

Western Digital GuidanceSource

They guided to 29% gross margins. Look how that compares to their trend. It’s a big jump.

Fiscal Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Month Mar Jun Sept Dec Mar Jun Sept Dec
Fiscal Year 2019 2019 2020 2020 2020 2020 2021 2021
Calendar Year 2019 2019 2019 2019 2020 2020 2020 2020
A E E E E
Gross Profit 928 880 1002 1098 1233 1341 1763 1846
Margin 25.3% 24.2% 24.8% 25.9% 29.4% 31.0% 35.0% 36.3%
bp change -18.1% -16.8% -13.2% -5.4% 4.1% 6.8% 10.2% 10.4%
2yr% -14.0% -17.1% -17.5% -17.3% -14.0% -10.0% -3.0% 5.0%

Source: Elazar Advisors models with data from Western Digital

Above you see the year-over-year trend go from negative 18% a few quarters ago to now up 4.1% in their guided March quarter.

You see how we model gross margins thereafter based on the improving two-year trend. They also said on their earnings call that gross margins could reach 35%-40% later this year.

Based on their guide gross margins plan to go from -5.4% year-over-year to +4.1% in one quarter’s time. That’s a 9.5% swing in one quarter which is huge.

The main driver is a combination of demand picking up and weak supply.

Here’s what they said:

“The other thing is that, as part of all that is, is that there is an increasing awareness on behalf of our customer base that inventory supply and demand is tightening up.

In other words, demand is going to exceed supply this year.”

Sweet words from a cyclical.

Demand is picking up. Some of that may be because customers see tight supply so they have to increase orders to make sure they get what they need.

That’s how cyclicals work. Under-ordering leads producers to cut production. Then there’s tight supply. Then you have over-ordering, sending prices up. Then producers chase prices with more production. Supply catches up then prices turn back down.

We’re back in the up-cycle where pricing is starting to move up which is the key beneficiary to the P&L.

Micron Benefits From Western Digital’s Trends

I view all this as support for the Micron thesis that they too are seeing similar trends.

Micron Mix of RevenuesSource

Above you see from Micron’s earnings presentation that they are 28% NAND and 2/3 DRAM. I will say that memory trends tend to move together because they have many of the same end customers –datacenter, mobile, gaming, etc.

So tech needs memory, both NAND and DRAM, so general tech trends drive them both.

You heard WDC talk about pricing trends above. Here’s the DRAM chart seeing similar strength.

DRAM Pricing Chart

Source

Above you see DRAM prices taking off. That’s benefiting Micron gross margins and earnings. I believe you have to stay on top of the datapoints to make sure your thesis is coming to fruition. WDC’s pricing comments match DRAM pricing trends and is another confirmation things are continuing in the right direction.

Again, these pricing trends are as critical as you get for both Micron and WDC.

China Health Issues

The health issues in China are a very tough story and we wish a speedy end to the spread of this problem.

China is very important to both Micron and WDC. Demand reduction is a risk to overall tech. But I believe they’ll find a cure soon or the epidemic will slow down.

For this reason though I think there’s a shot we get buying opportunities in both of these stocks.

I also think the combination of China health issues with the a potential Fed taper of their big repo buying support can give us decent buying opportunities. The Fed pulling back on quantitative easing type actions can soften up the market.

Upside and Conclusion

Currently I have WDC at about fair value. (Full model: Paywall). For Micron I have much more upside with an $85 12 month target (Full model: Paywall).

So I’m more bullish on Micron than WDC but think both benefit from the trends and both are worth looking for buying opportunities.

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Earnings season is here. This is our prime time. We recently spoke to a ton of companies. QCOM, SQ, TER, MSI, TTWO, ATVI, ROKU, AAPL, TTD, TWTR, SWKS, TSLA, FTNT, ANET, INTC, TWLO, WDC, JNPR, SPLK, MSFT, LRCX, FB.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. All model portfolio trades are hypothetical to show direction, conviction and timing. Performance excludes all relevant transaction costs. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.





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