Micron (NASDAQ:MU) called for a second-half pickup. Meanwhile most of the data points are calling for a slowdown. I think it's dangerous to ignore the news out there.
Here's what Micron said last quarter,
"We expect growth to resume in the second half of calendar 2019 as we see improvement in our customers’ inventory position."
But to expect a second half pickup you'd think they were seeing it. But here's what they said. They were only seeing things get worse yet still sticking to their second half pickup plans.
"Since our last earnings call, DRAM pricing weakened more than expected. Our demand outlook for calendar 2019 has moderated, led by somewhat greater levels of customer inventory, weakening server demand at several enterprise OEM customers and worse-than-expected CPU shortages. We believe macroeconomic uncertainty is also contributing to hesitation in buying behavior at some customers."
What I'd like to do is take this article to review some of those main points that were bothering Micron last quarter and see if they are turning around. If not I have strong doubts that they meet their second half pickup plans.
Let's review some of the headwinds they pointed out last quarter.
Micron: "DRAM pricing weakened more than expected"
Above you have real-time spot pricing of DRAM according to DRAMeXchange.
This is the key to Micron earnings. Pricing drives gross margins and is probably the largest swing factor to decide our EPS estimates.
Micron said pricing weakened more than expected last quarter. Based on the above chart I don't think much as changed here for the most critical datapoint to Micron's business.
If you heard Cisco's call yesterday, you also heard them say,
"DRAM turned this quarter and became a tailwind for us in Q3."
Cisco buys DRAM so it being a tailwind means pricing dropped. I think that's a pretty real time industry check to confirm the DRAMeXchange pricing trends.
Micron: "Our demand outlook moderated"
Micron expects a second half pickup because they chalk up the current weakness to inventory absorption. That should pass when inventories normalize, right?
"We saw less than the normal order strength in late March and in the month of April. We are therefore forecasting slower growth in Q2 2019 from our normal and historical patterns. Some of the contributing reasons for this are one the massive cloud titan providers fulfilled in 2018 have led to a period of absorption in the first half of 2019. In particular, one cloud titan has placed most orders on hold for Q2 2019.
Arista also called out inventory absorption but I view their take as a real-time update on the state of the industry. It's not getting better. We did not yet pass the period of inventory absorption. We're knee deep in it.
We showed that Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) all cut capex meaningfully in Q1. Apparently Arista saw a real-time slowdown in late March and April. They expect a follow through in Q2.
When does this slowdown end? We have no idea. I don't think anybody knows but everybody's looking for a pickup. But things keep getting worse so I don't know how everybody's looking for a pickup.
"I caution and say the fourth quarter was the first quarter that we had negative growth."
They are saying they still expect multiple quarters ahead with lower revenues. Things are not getting better. They are not bottoming.
Intel (NASDAQ:INTC) also said on their earnings call in late April that business was getting worse.
"The decline in memory pricing has intensified. The data center inventory and capacity digestion that we described in January is more pronounced than we expected, and China headwinds have increased, leading to a more cautious IT spending environment."
Intel also said however, "And yet those same customer conversations reinforce our confidence that demand will improve in the second half."
OK, customers are pulling orders now and saying things will get better. Things are getting worse now but expect better. That doesn't make sense to me, at all.
All I know is that you have major companies telling you real time that inventory absorption is not over. And demand is getting worse, not bottoming. In that environment I don't know how you can expect a pickup.
Micron: "Worse-than-expected CPU shortages"
We did see one note out that Intel supply shortages may start to "partially ease" in June. That tells me they didn't ease yet and they will start to ease in June but slightly.
Micron: "Macro uncertainty"
Needless to say the prolonging of the trade war is not going to help. I think the trade war was the major catalyst for this semiconductor cycle to start turning down back in 2018.
Now that a Trump-Xi resolution just got pushed out CEOs globally will likely continue to tread cautiously. That means they likely push out incremental large purchases. That's what causes cycles.
I don't expect a second half pickup because of this. And we have no evidence of anything bottoming ahead of that second half pickup. If anything macro news just got worse and business is reported to get worse.
Before we get a pickup we need things to flatten out. I don't hear things flattening out yet, do you?
Take On Tech
Generally tech is one big food chain. Companies sell into each other or alongside each other. Right now major cloud companies are few in number but driving the overall demand pie. And cloud customers have slowed spend real time.
You have enterprise customers which are more fragmented and have been stronger but the cloud companies' meaningful slowdown of late is probably the bigger datapoint.
Memory is in pretty much everything tech so I use Micron as a gauge for tech and tech as a gauge for Micron.
I don't hear things getting better. I don't hear things bottoming. I only hear things getting worse. Before I expect a pickup I'd like some supportive datapoints of things bottoming. I'd love to see pricing stop going down so rapidly. We appear far from that.
Micron, Intel and a bunch of other tech companies are looking for a second half pickup. Do we need to just accept that without watching the real-time datapoints needed to drive that pickup? I don't think so.
So far I only see the major drivers getting worse.
I don't see a second half pickup. Be careful.
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