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Micron Gains as Cloud Strength Boosts its Earnings and Guidance

The memory giant topped estimates and issued better-than-feared guidance, while stating demand from notebook and data center clients is offsetting weakness elsewhere.
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While Micron’s  (MU) - Get Free Report sales to some major customers are under pressure, its sales to some others are holding up pretty well right now.

After the bell on Wednesday, the memory giant reported February quarter (fiscal second quarter) revenue of $4.8 billion (down 18% annually) and non-GAAP EPS of $0.45, topping consensus analyst estimates of $4.69 billion and $0.37.

Micron also guided for May quarter revenue of $4.6 billion to $5.2 billion and non-GAAP EPS of $0.40 to $0.70. The midpoints of those wider-than-usual guidance ranges are slightly above consensus estimates of $4.87 billion and $0.52.

With markets having been on edge about the COVID-19 pandemic’s impact on Micron’s sales, the numbers are going over well. As of the time of this article, Micron’s stock is up 5.3% in after-hours trading to $44.75. Shares are now up 44% from a March 18 low of $31.13, albeit still down 27% from a Feb. 12 52-week high of $61.19.

In its prepared remarks, Micron did caution that it expects smartphone, consumer electronics and automotive demand to be below prior expectations during the second half of its fiscal 2020 (ends in Aug. 2020). However, the company also noted it has seen higher notebook demand as more workers and students work and learn from home, and that demand from data center end-markets (already on the upswing in recent months thanks to a cloud capex rebound) is strong as usage for various online/cloud services grows, and even leading to shortages.

In addition, Micron reported that China’s COVID-19 pandemic weighed on its sales to consumer electronics clients and caused factory shutdowns for some clients. However, it added local data center demand was strong, and that Chinese smartphone production volumes have begun to rebound.

Micron's near-term demand outlook. Source: Micron.

Micron's near-term demand outlook. Source: Micron.

Micron’s demand commentary has some things in common with what GPU giant and Micron graphics DRAM client Nvidia  (NVDA) - Get Free Report shared on a Tuesday conference call. Among other things, Nvidia said it’s seeing strong demand for GPUs going into notebooks and cloud servers, and indicated Chinese demand has begun normalizing. Micron, for its part, disclosed that its bit shipments of GDDR6 graphics DRAM (used by some of Nvidia’s GPUs) rose over 40% sequentially last quarter.

Supply/Demand and Capex Guidance

With full-year supply and demand trends quite uncertain right now, Micron chose not to provide calendar 2020 outlooks for DRAM and NAND flash memory bit supply and demand growth -- either for itself or the memory industry at-large.

In December, Micron guided for DRAM industry bit demand to grow by a mid-teens percentage this year, and for NAND bit demand to grow by a high-20s to low-30s percentage. Now, Micron is merely reiterating long-term guidance for DRAM bit demand to see a mid-to-high teens compound annual growth rate (CAGR), and for NAND bit demand to see a roughly 30% CAGR.

Micron is also for now reiterating fiscal 2020 capital spending guidance of $7 billion to $8 billion, while adding that it’s evaluating its capex plans for calendar 2020. Several chip equipment makers, including Applied Materials  (AMAT) - Get Free Report, have withdrawn their quarterly guidance, while noting that recent lockdown orders have impacted their manufacturing operations.

Inventory Builds

Micron received a few questions on its earnings call about inventory levels -- both its own and those of its customers.

Micron’s inventory rose by $300 million sequentially to $5.2 billion, leading its days of inventory to rise by 13 to 134. The company insisted that much of this growth was due to seasonality and the holding of additional NAND inventory ahead of a technology transition. However, it also reported building its raw materials stockpiles due to supply chain uncertainty.

Separately, Micron admitted that just as it’s stockpiling raw materials, some of its customers could be stockpiling memory products, and that these efforts could be masking weakening end-market demand.

Pricing Strength

Following a sharp downturn in late 2018 and early 2019, DRAM and (especially) NAND pricing trends have seen meaningful improvement, as industry capex cuts make themselves felt. And for now at least, Micron insists memory pricing trends remain favorable.

During the February quarter, Micron’s DRAM average selling price (ASP) was roughly flat sequentially, after having dropped by a high-single digit percentage in its November quarter. NAND ASP rose by a high-single digit percentage, after having risen by a low-single digit percentage in the November quarter.