Our title of the article was meant to be obnoxious, and obnoxious for one reason; Micron (NASDAQ:MU) will obliterate the consensus estimate of $0.61 EPS. For a more detailed description of our Micron thesis, please review this article first beforehand.
Let's first take a look at the projections the management gave us:
- DRAM continues to make up 69% of approximate revenue figures.
- NAND continues to make up 26% of approximate revenue figures.
- NAND bit growth to be up high teens, ASP down high teens, which cancel each other out.
- DRAM bit growth to be flat and ASP to be flat.
- Cost per bit will be down mid teens for NAND, and high single digits for DRAM.
These assumptions here are crucial in determining how devastating the beat will be, and as the readers will note below, our estimates will take into account a varying degree of situations. However, a beat is almost assured.
All estimates project costs to be at the high end of the guidance for conservative purposes.
Diluted EPS figure stated in the below projections is non GAAP EPS. The figures include these adjustments:
A total of $195 million was added to the net income figure. These are some of the adjustments related to the Elpida acquisition.
An adjustment is also made deducting $25 million in equity compensation expenses.
Our Base Case Estimates:
In our base case assumption, we viewed revenue to be flat in Q2. Guidance indicated that per bit growth should cancel out the ASP decrease in NAND, which was 26% of total revenue. DRAM that is 69% of the revenue should remain flat from Q1.
On the cost end, NAND per bit cost is projected to decrease by mid teens. We projected a 15% decrease on 26% of the revenue, a 3.9% increase in gross margins. DRAM is projected to decrease high single digits. We projected a 9% decrease on 69% of the revenue, a 6.21% increase in gross margins.
Inotera, which Micron owns a 35% stake in, reported record earnings of $364 million for Q1. At a 35% stake, that gives Micron an equity net income of $127.4 million.
Using our base case assumptions, we arrived at a non-GAAP diluted EPS of $1.12, which smashes the most optimistic of estimates, $0.77 (by Rajvindra S. Gill of Needham & Co.)
In our bear case assumption, we viewed revenue to be down 10% in Q2. We assumed that DRAM bit growth was actually down 10%, while the bit growth for NAND was only in the high single digits.
On the cost end, we projected NAND cost per bit to only decrease by 10%, a 2.6% increase in gross margins. We projected DRAM cost per bit to only decrease by 5%, a 3.45% increase in gross margins.
As the readers will note, even after using bearish estimates that are unrealistic, the non-GAAP diluted EPS figure is still higher than the consensus estimate of $0.61.
Bull Case Scenario:
In our bull case scenario, we will be using the low-end guidance for all the cost inputs.
We projected DRAM bit growth to increase by 5%, and NAND per bit growth to increase 5% more than the ASP decline.
Cost per bit assumptions remain the same as the base case scenario.
Obviously, we hope for the bull case scenario to play out, but we are confident in projecting our base case assumptions.
As the readers will note, even if we were to use the bear case assumptions, non-GAAP diluted EPS figures will handily beat analyst estimates.
We remain firm on our year-end price target of $40.
Disclosure: I am long MU. 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.