Micron Technology (MU) reported a large Q3 miss last Thursday, announcing $0.07 per share vs. consensus estimate in the $0.13 to $0.17 range. Traders reacted promptly, pummelling the stock for a 14.47% drop the next day. The equity has now seen a skid for more than third of its value in the last three months, posting a 37.58% downswing.
- Revenue was a reported $2.14B, down from $2.28B last year, missing Street expectations of about $2.35B.
- DRAM sales (60% of FY2010 revenue) dropped 7% compared to Q2 on lower volume.
- NAND memory (28% of FY2010 revenue) dropped 5% compared to Q2 on lower ASPs.
- Gross margin saw a slight increase compared to Q2, up to 22% from 19%.
The post-announcement conference call is best summed by a direct quote from CEO Steve Appleton:
More specifically, desktop and notebooks continue to be weak and I'll just say that I don't think we really have a good feel for how that's going to play out over the next quarter or two.
In other words, PC sales have lagged and Micron's revenues have mirrored the sag in consumer demand. Mark Adams, the VP of Sales, echoed the remarks while answering a direct question in regards to Q4 forecasts:
We've all seen a softening of the desktop, notebook, PC climate. Partially offset by some growth around tablets, more helpful on the NAND front, obviously, than the DRAM front. But it's been pretty hard to kind of see beyond Q3 calendar year in terms of what the demand picture looks like as some of the bigger OEMs have kind of come out and made their forecast, the analysts certainly have made their forecasts and overall, the PC environment is weak at this point and hard for us to call too much further out in the future.
Notwithstanding reluctance to forecast in the near-term, some very good news about the company's forward-facing prospects are buried deep in the call. The first item is that Micron's overall income stream seems to be shifting in the direction of NAND memory as tablets, MP3 players and smart phones continue to see explosive growth. This bodes well for sustained gains in gross margin.
Kipp Bedart, Micron's VP of Investor Relations flatly stated Micron's getting "awful close to having NAND surpass total DRAM revenues for the first time in our history," a clear trend-switch from last year's revenue breakdown (60% revenue in DRAM sales vs. only 28% in NAND) and later came out swinging in a straightforward statement about margin prospects:
In terms of gross margin ranking, trade NAND is one of the better ones we have. It's about our second-highest gross margin. So to the extent that we're shipping more of those bits, that will certainly help on the gross margin.
The other piece of good news is a reported increase in free cash flow and reiteration to lower Capex as the company seems to have already made the necessary investments to support the switch in DRAM/NAND mix.
MU has also suffered on news of Rambus' (RMBS) lawsuit against Micron and Hynix Semiconductor alleging the latter engaged in a "secret and unlawful conspiracy" to drive the plaintiff out of the computer memory market. The trial began on the June 20th, with $4.3B sought in damages which would be automatically tripled under California law.
Micron is now trading at a discount to book value, below a 0.9 multiple and below 6x forward P/E, at the bottom of its historical P/E channel (Source: Yahoo Finance, S&P Company Compustat Report.) Although multiple analysts have slashed price targets given the weakness of Q3 results, they remain strongly bullish with a mean 12-mo target of $13.90. Goldman Sachs remains a notable exception with a $7 target on worries about significant PC demand drop through Q4's critical back-to-school season.
On valuation and strategic position, Micron Technology remains a BUY with the following strong caveat: the equity trades more like a penny stock than a multi-billion dollar semiconductor giant and has shown extreme volatility in the last six months. If broad indexes continue to show weakness, there may not be a solid floor in sight. Investors looking to establish or expand positions should purchase in small tranches for cost-averaging purposes.