Micron's Guidance and Commentary Calm Recent DRAM Fears

After briefly putting investors on edge, Micron (MU) affirmed that business remains pretty good.

Results and Guidance

Following Wednesday's close, Micron reported May quarter (fiscal third quarter) revenue of $7.8 billion (up 40% annually) and non-GAAP EPS of $3.15, slightly topping consensus analyst estimates of $7.76 billion and $3.13. DRAM revenue (71% of total revenue) rose 56% annually and was a little better than expected, while "trade NAND" flash memory revenue (25% of revenue) rose 14% and was roughly in-line with expectations.

Shares initially slipped post-earnings due to worries about guidance -- unlike in prior quarters, Micron didn't share its guidance through its earnings slides. But they moved higher after CFO David Zinsner guided on the earnings call for August quarter revenue of $8 billion to $8.4 billion and EPS of $3.23 to $3.37, favorable to consensus estimates of $8.02 billion and $3.16.

Also likely going over well: CEO Sanjay Mehrotra said (amid worries about rising DRAM-related capital spending) Micron is "comfortable" with prior forecasts for 2018 DRAM industry bit supply growth of about 20% and NAND supply growth of 40% to 45%.

Shares rose 2.7% in after-hours trading to $60.56. They're up 47% on the year.

DRAM Remains Very Strong

In addition to reporting solid total DRAM revenue, Micron offered favorable numbers and commentary for many of its key DRAM end-markets.

Cloud server and graphics DRAM sales both more than doubled annually, as strong cloud capex boosts the former and gaming and AI-related demand gives a lift to the latter. Good design win activity was reported for Micron's low-power automotive DRAM offerings, and the company also indicated demand was strong for memory products used within industrial and embedded/IoT products.

And though smartphone sales have been pressured, Micron was upbeat that the amount of DRAM going into the average phone will continue rising and that the company's low-power mobile DRAM offerings leave it well-positioned competitively. Total mobile segment revenue (DRAM plus flash) was up 55% annually.

Strong pricing and higher volumes led Micron's DRAM gross margin to rise to 69% from 66% in the February quarter and 54% a year ago. Which in turn helped Micron's total gross margin rise to 60.9% (a little better than guidance of 57% to 60%) from 48% a year ago. Though concerns have been voiced about DRAM pricing topping out, Micron's DRAM average selling price (ASP) rose by a "mid-to-upper single-digit" percentage sequentially last quarter.

Flash is More Complicated, But Better Than Feared

Trade NAND revenue growth was much lower than DRAM growth, and -- amid many reports that flash pricing is weakening a bit -- Micron said NAND pricing fell a little sequentially on a "like-for-like basis." However, thanks to a mix shift towards solid-state drives (SSDs) and managed NAND products that carry higher ASPs and margins than commodity chips, trade NAND ASP was up by a "mid-to-upper single-digit" percentage sequentially.

Micron also noted that its NAND sales to cloud clients rose 24% sequentially, reiterated it expects the amount of flash going inside the average smartphone and SSD to continue growing and forecast the ramp of its high-density, 64-layer, 3D NAND chips will improve the cost structure for much of its NAND business. The 64-layer ramp will be followed a ramp for higher-density 96-layer 3D NAND chips, which are set to start production later this year.

On the other hand, progress remains slow for Micron's efforts to commercialize products based on 3D XPoint, a next-gen memory technology it co-developed with Intel (INTC) . Whereas Intel began shipping its first 3D XPoint-based SSDs last year and recently unveiled DIMMs (memory modules) that can function as a server's main memory, Micron only says its first 3D XPoint products will launch in late 2019, with "meaningful" revenue recorded in 2020.

In the meantime, costs related to 3D XPoint are slightly dinging Micron's gross margin and caused a 7-percentage-point hit to the operating margin for its Storage Business Unit (SBU), which covers much of the company's flash memory sales.

The Big Picture

Rumors of the DRAM boom cycle's demise still look greatly exaggerated. Micron, Samsung and SK Hynix (the industry's big-3) have clearly learned a lesson or two from past industry downturns, and still look committed to keeping supply growth under control. Meanwhile, demand from the cloud, graphics and embedded hardware has been growing fast enough to soak up moderate supply increases.

There's still a strong possibility that flash price declines will eventually start to weigh on Micron's NAND ASPs. However, the 3D NAND ramp and a mix-shift towards higher-ASP products could keep a lid on margin pressure, and as management notes, lower prices are boosting NAND consumption. It's also worth keeping in mind that NAND accounts for less than a quarter of Micron's gross profits.

As for Micron's stock, it still trades for less than 6 times the company's pre-earnings fiscal 2019 (ends in August 2019) EPS consensus. As cyclical as the memory industry has historically been, that feels pretty cheap for a company whose most profitable business is still looking very healthy. Particularly with a $10 billion stock buyback set to kick off during the next fiscal year.