Why Micron Earnings are Even More Important than FedEx Earnings This Year

Yesterday Idaho-based Micron Technology reported its quarterly earnings results. Revenue came in at $7.42 billion against $6.24 billion for the prior quarter and $5.44 billion for the same period last year. GAAP net income was at $1.74 billion, or $1.52 per diluted share, while non-GAAP net income reached $2.17 billion, or $1.88 per diluted share. Operating cash flow of $3.56 billion exceeded $3.06 billion for the prior quarter and $2.02 billion for the same period last year.

Just like Intel (INTC), Micron Technology (MU, +2.47% as per June 30 market close) expects memory-chip demand to remain high “even as the supply of other types of computer chips meets customer needs”. More precisely, on an analysts call, Micron CEO Sanjay Mehrotra said that as semiconductor supply shortages subside, memory demand will still remain high. The CEO expects that customers that need chips to make their products are “approaching their inventory considerations in a different manner compared to before.” What does it mean?

The continuing memory chip saga is a classic logistical bottleneck problem. Imagine a wine cork producing company that is solely reliant on vineyards. Let’s then suppose that due to severe weather the entire grape harvest failed, so the former entity has little choice but to dump the entire annual cork production. Let's imagine for simplicity that corks are perishable (and microprocessor chips are for this purpose, since the industry’s development is so fast that next year chip upgrades invalidate the previous year’s batches). So when next year the very same vineyard faces a lavish grape crop and prepares to compensate for the previous year's failure, it encounters the impossibility to sell a single bottle of wine due to lack of corks sealing the bottles. This is more or less what is happening now with microchips. But, unlike in our example with corks, microprocessor chips is a much more technologically advanced industry requiring more time and effort to return to full scale up-to-date manufacturing.

Last year, the COVID-19 pandemic disrupted supply chains and caught many manufacturers, such as automakers, that are increasingly heavily dependent on semiconductors in modern reality, off guard.

Micron has a very special market niche even compared to Taiwan Semiconductor Manufacturing Company(TSM), since it specializes in ever-important essential DRAM and NAND memory chips. DRAM, or dynamic random access memory, is the type of memory utilized in PCs and servers, while NAND chips are the flash memory chips used in smaller devices like smartphones and USB drives.

Micron said for the past quarter DRAM sales made up 73% of revenue, or $5.42 billion, up from $3.59 billion in the year-ago period, while NAND accounted for 24% of revenue, or $1.78 billion, up from last year’s $1.67 billion.

The company also said it expects demand for DRAM to grow more than 20% for 2021, with NAND growth “in the mid-30% range”. Based on that, Micron expects adjusted fiscal Q4 net income to reach $2.20 to $2.40 a share on revenue of $8 billion to $8.4 billion. This is slightly over consensus forecast of $2.18 a share on revenue of $7.88 billion.

Due to the market mystery Micron shares have slipped 1.8% over the past quarter, while the Philadelphia Semiconductor Index (SOX), while plunging from 3300 to 2900 midquarter, has fully recovered by now suggesting more participating stocks are on their way to show more luster. During Micron’s third quarter, shares tested their minimum at $77 a share, and now signaling a robust bull trend all the way up to its all-time closing high of $96.56, set on July 14, 2000.