A Disastrous Earnings Review
Many investors are wondering what to make of Micron Technology, Inc. (NASDAQ:MU) after its less-than-stellar earnings review. The firm’s poor performance dragged MU stock down 9.16% in a single trading session.
It looked to me like investors were giving up on Micron stock. Such a sharp decline, especially mixed with heavy trading volumes, can wound a share price like nothing else. It didn’t help that Micron’s net losses grew even bigger compared with the year-ago quarter. (Source: “Micron Technology, Inc., Reports Results for the Third Quarter of Fiscal 2016,” Micron Technology, Inc., June 30, 2016.)
The firm’s bottom line has been drenched with red ink. The interesting thing is that sales have been rising in almost all of Micron’s reporting segments, but didn’t translate into net income. In fact, the firm’s net losses have expanded.
What’s going on here? There are three main headwinds to consider.
For years, the microchip market was booming. Engineers were able to double processing speeds every two years and that kept the industry growing rapidly. The problem was that everyone knew about it.
New firms sprung up all over the place, flooding the market with microchips and the sudden influx drove prices downward. For want of a few dollars, microchip makers had turned their industry into a buyer’s market.
They effectively destroyed their own profitability.
Take, for example, the company’s most recent quarter. Micron was in the hole for $215 million, a stunning amount considering that sales for its signature DRAM chips jumped 22%. Almost all other segments had increasing sales as well.
There was no stopping the fall, though. DRAM’s average price per-bit was 11% lower than the previous quarter, not the one from a year before. Prices just seem to be falling faster than Micron can shave costs.
2. Moore’s Law
Remember when I said engineers were able to double processing speeds every other year? Well, that’s no longer true. It was true for several decades, but then engineers hit a brick wall. There are many technical limitations that make it impossible for them to continue the trend. I expect many firms are going to pull back from the two-year production cycle, thus crushing their ability to make huge profits.
3. Fewer Computer Sales
More than anything else, microchip companies like Micron are getting crushed by slowing computer sales. Nothing scares investors as much as slowing demand, which would make sense if those firms weren’t already diversifying their product portfolios. They saw the writing on the wall just as clearly as everyone else.
Although these three headwinds are holding back the industry at-large, they’ve had an outsized effect on MU stock. The market was expecting Micron to be profitable again next quarter, but the firm’s guidance threw some doubt on those estimates. That’s why the share price fell 9.16%.
During a conference call, Micron’s CEO explained that the company needs time to balance its per-bit cost and revenue. He says that the supply of microchips is leveling off, a hopeful sign for firms that have been ravaged by falling prices.
Reduced supply could stabilize the spot price of DRAM chips, but Micron’s CEO insisted that it would take time for those effects to show up on financial statements. We may not see their per-bit revenue surge as soon as previously thought.
So Micron is focusing on the other side of the equation, which is per-bit cost. The company is restructuring itself to become more competitive. Many people are going to lose their jobs, but on the upside, the company will save almost $300 million. (Source: “Micron stock sinks amid company restructuring,” CNBC, July 1, 2016.)
“To address the current market environment and strengthen our competitive position, we are implementing a number of initiatives to reduce costs, drive greater efficiencies, and increase focus on our strategic priorities,” said CEO Mark Durcan. (Source: Ibid.)
The cost-cutting program might be enough to pull MU stock back out of the doldrums, but I’m still on the fence. To put it bluntly, there are too many forces weighing on the stock, so waiting on the sidelines might be the best move.