Micron: Q3 Earnings Will Be Interesting

| About: Micron Technology (MU)

Summary

Micron is primarily a DRAM company. DRAMeXchange reports spot pricing nightly and this quarter's price slide has been dramatic.

Former Micron Investor Relations chief Kipp Bedard tried to convince us that the pricing on DRAMeXchange was irrelevant since Micron wasn't active in the spot market. He was WRONG.

New memory technologies like 3DNand and 3DXpoint make Micron's medium to longer term outlook bright. But the short term outlook is terrible.

Micron Technology (NASDAQ:MU) presented the following earnings guidance on its last earnings call:

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And that earnings guidance should be viewed in the context of the overall analyst sentiment which is captured at Yahoo Finance:

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So the "average estimate" is for $2.96 billion in sales and ($0.09) in eps, both within the range of the company's guidance, above.

The sellside analyst I most respect in this space is Bernstein's Mark Newman. Newman used to work in the semi division of Samsung and he knows his stuff. But he is not infallible. Not to hold you in suspense, Newman is estimating a 12 cent loss in eps, on revenue of $3.1 billion. Most importantly, Newman takes a stab at breaking out the components of his model, hazarding his guess on DRAM and NAND contributions to profit/(loss). And below, I will take my stab at running a sensitivity analysis based on an Excel recreation and manipulation of Newman's model. I will even hazard my own 3Q guess-- but I am not infallible either!

What are Newman's assumptions for the 3Q? Here they are as presented in a May 18, 2016 report as Exhibit 81:

Click to enlargeI chopped the rest of his assumptions for clarity and to just highlight his 3Q assumptions.

To me the most glaring potential soft spot was his assumption of an average selling price ("ASP" in the clip above) of $0.57/Gb for DRAM in the quarter. I've written here on the plunging DRAM price and that number just doesn't look quite right.

Alas, the oldest screenshot for the quarter that I have for spot pricing from DRAMeXchange is this one from April 22:

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And here's the DRAMeXchange spot pricing from last night:

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My takeaways from the two DRAMeXchange snapshots? Just averaging the six prices at each snapshot, the average price per Gb was 44.179 cents in April and was 40.113 last night. Most alarmingly the DDR4 8Gb part to which Micron is madly transitioning was down 19.5% in just a little more than a month. Most importantly neither average price is anywhere near Newman's 57 cent ASP for the quarter. This led me to do a sensitivity analysis holding everything constant in his model and just varying DRAM ASP/Gb, which I'll get into below.

But first, another Newman chart on DRAM spot vs. contact prices for those, like former Micron IR czar Kipp Bedard, who think the DRAMeXchange spot pricing is overblown in importance or irrelevant.

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This is from Newman's "Memory Tracker" report dated April 28, 2016. Note two things from this chart: first, spot and contract prices are almost perfectly correlated for the last couple of years. You may not be active in this market Kipp but the price signalling is indeed relevant. And second, note that recently contract prices have been BELOW spot prices.

Newman's model and a sensitivity analysis. Here is Newman's estimate for the 3Q, other data chopped out for clarity. This appeared in his May 18th report:

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And here is my sensitivity analysis, using the basic model above and varying only the ASP in $/Gb presented above:

DRAM ASP in $/Gb Micron 3Q eps
.57 -.12
.55

-.17

.525 -.24

.5

-.32
.48 -.38
.46 -.44
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Conclusions: DRAM spot pricing has continued to drop since Newman's reports quoted herein. And I can't come back to his basic assumption that Micron saw average selling prices of $0.57/Gb during the 3Q, given the two DRAMeXchange snapshots shown.

I wouldn't be surprised if Micron reported a loss of more than 20 cents in the 3Q. I wouldn't be surprised if they feel compelled to pre-announce prior to the rumored (why can't they put dates on their website?) June 23 unveiling of their 3Q earnings.

I've written earlier that many analysts feel this May quarter may be the trough in Micron's earnings. I hope so. I own 100 shares of stock to keep my attention focused. I may short shares, write call credit spreads or buy put spreads before the earnings announcement since I foresee a big miss on both the revenue and eps guidance. In the medium to longer term, six months plus from now, I think Micron will be solidly back in black ink. Their aborted unveiling of the MX300 3DNand drive on NewEgg does not fill one with confidence. The ever disappearing horizon of 3DXpoint parts in the wild does not fill one in confidence. But I am convinced they will happen and we will forget the dim current earnings and revel in new memory fueled black ink on the bottom line.

Disclosure: I am/we are 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.