Masdea asserts that the consensus estimates for the quarter are too high. He trimmed his revenue estimate for the quarter to $1.55 billion from $1.62 billion to reflect lower NAND flash pricing and lower revenue from the company’s Lexar division. He sliced his gross margin estimate to 28.4% from 30.1% based on lower NAND margins and slightly higher R&D spending; his EPS estimate drops to 15 cents a share from 23 cents. The consensus view is 20 cents.
Masdea says the current consensus for the fiscal second quarter ending in February also look too high. He dropped his estimate to $1.48 billion from $1.62 billion, “mainly on lower DRAM units,” and took his EPS estimate to 9 cents from 19 cents.
“While DRAM pricing has been strong recently,” he writes, “we believe some stability has been tied to OEM positioning for Vista amid a low inventory environment and expect that pricing could see softness heading into the new year…We expect NAND to stay weak despite some capacity mix shift toward DRAM. In NAND, scale-driven margin benefits are not likely to materialize for another two to three quarters.”
Madsea notes that the stock is down 23% since the last earnings call, and trades at a “reasonable” valuation; he says he would “become more positive on estimate cuts coming out of earnings.”
Meanwhile, W.R. Hambrecht’s Daniel Amir today downgraded Micron shares to Hold from Buy.
Amir cited four reasons for his downgrade:
- While the DRAM market remains stable, we are becoming increasingly concerned that coming [in the 2007 second quarter], when the first initial Vista build ends, the increasing DRAM capacity is likely to negatively impact the supply-demand dynamics in DRAM.
- Recent channel checks provide us with growing concern on the Image Sensor market in that we could see a weakening of the market with increasing competition; In addition, we are concerned about the continuing ASP pressure of the VGA business (25% Image Sensor sales) in the short-term.
- While we are positive on the diversification to NAND as a favorable long-term strategy, we believe that Micron is not going to leverage its strength on NAND until [the 2007 second half]. In the short term, we have growing concerns surrounding the Lexar Media business.
- Micron is facing an increasingly challenging position with the investment community as we believe investors have other ways of playing Micron’s segments - DRAM (Qimonda (QI)), NAND (SanDisk (SNDK)), and Image Sensors (Omnivision (OVTI)). Therefore, in our opinion, investors should own MU shares if two of these segments outperform. In the current market environment, we do not see this and therefore recommend investors to move to the sidelines.
Micron shares are down 23 cents at $13.30.