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Micron Technology

Baird analyst reiterates Underperform rating on US chipmaker Micron Technology

The downcycle in DRAM memory chips has just started and NAND memory chips face reduced profitability, according to Baird's Tristan Gerra

Micron offices
Cash flow from operations in Micron’s latest quarter was $4.8 billion, up from $3.6 billion in the year-ago quarter

Baird analyst Tristan Gerra reiterated his underperform rating on the chipmaker Micron Technology Inc (NASDAQ:MU) on Wednesday on the view that the downcycle in DRAM memory chips has just started and NAND memory chips face reduced profitability.

“In DRAM, we remain unconvinced that Micron’s competition will be as proactive reducing bit supply given a still very-high gross margin profile, while reduced profitability in NAND incentivizes suppliers to migrate to lower-cost architectures to improve costs but which potentially limits supply reductions,” wrote Gerra in a note to investors.

READ: Micron Technology plunges after gloomy earnings forecast sparks memory demand fears

"Reiterated Underperform rating on our skepticism of a soft landing, as DRAM downcycle has just started while more downside exists in NAND given the significant premium for contract versus spot
pricing," Gerra added.

The Baird analyst currently has a $32 price target on the stock.

The tone of Wednesday’s research note has changed dramatically from mid-October when Gerra had an Outperform rating on Micron and a $75 price target for the US chipmaker.

Based in Boise, Idaho, Micron is the second-largest supplier of memory chips globally, offering chips that include DRAM, NAND flash and NOR flash.

In its fiscal first quarter, the adoption of ASC 606 accounting rules created an increase of $95 million in reported revenue and $49 million in reported net income, according to the Baird note, which focused on Micron’s latest 10Q regulatory filing highlighting its latest quarterly report.

But Micron’s gross margin fell by 300 basis points in its latest quarter due to falling prices for DRAM and NAND chips.

Sales to Intel related to the Intel Micron Flash Technologies (IMFT) joint venture came to $175 million in its latest quarter, up from $112 million in the year-ago period. The partnership is set to end as Micron announced last October that it intends to exercise the option to acquire Intel’s interest in IMFT.

Huawei Technologies is Micron's big customer

Huawei Technologies, the Chinese technology company, contributed 13% of Micron’s total sales in the fiscal first quarter and no other customer exceeded 10% of all sales in the quarter.

Cash flow from operations in Micron’s latest quarter was $4.8 billion or $4.10 per share, up from $3.6 billion or $2.9 per share in the first quarter of 2018. Free cash flow, meanwhile, amounted to $2.1 billion, up from $1.5 billion over the same period.

Under an accelerated share repurchase agreement, Micron repurchased an aggregate of 42 million shares for $1.8 billion of stock in its latest quarter.

Earnings in focus

For the three months ended November 2018, Micron reported fiscal first-quarter earnings of $2.93 per share on revenue of $7.9 billion. The consensus earnings estimate was $2.90 per share on revenue of $8 billion. Revenue grew 16.3% on a year-over-year basis.

Last month, the chipmaker said during a conference call that it expects second-quarter earnings of $1.65 to $1.85 per share on revenue of $5.70 billion to $6.30 billion. This spooked Wall Street where current consensus earnings estimates hover around $2.42 per share on revenue of $7.57 billion for the quarter ending February 28, 2019.

"We're just going through an air pocket here related to primarily inventory adjustments as well as some seasonal, weak mobile demand, including mobile demand on the high end smartphones that is impacting some of our near-term visibility as well as the near-term outlook," Micron Technology CEO Sanjay Mehrotra told analysts on a conference call.

Micron’s memory chips are used to store information, in comparison with microprocessor chips made by companies like Intel, which provide computing power.

READ: Micron’s DRAM and NAND contract pricing decline in November, says Baird analyst

Looking ahead, Gerra sounded a note of optimism by saying pricing declines for NAND and DRAM memory chips could be “less drastic than expected and could stabilize” in the second half of 2019.

“If NAND and DRAM pricing do not decline as much a we expect, or stabilize in C2H19, there could be significant upside to our estimates, notably gross margin and earnings per share (EPS), which would invalidate our Underperform thesis,” Gerra wrote.

Micron shares traded 4% higher in afternoon trade on Wednesday to hit $33.01.

Contact Ellen Kelleher at [email protected]

Quick facts: Micron Technology

Price: $43.55

Market: NASDAQ
Market Cap: $48.07 billion
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