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Memory chip maker Micron reported better than expected revenues after the close Thursday seeing an initial bump in the share price. However after the conference call $MU shares slid 8% on NAND memory prices and production ramp plans.

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Micron Dram Wafer, Bullish Demand and Prices for 2018?

Earnings Beat Consensus Forecast

Micron fiscal second quarter GAAP net income more than tripled to $3.31 billion or $2.67 per diluted share. Revenue rose 58% year-over-year to $7.35 billion, driven by increased demand across the company’s products and end markets. Consensus was for EPS of $2.74 a share which is up 204% year over year, on sales of $7.28 billion, up 57% over the same period. Analysts expected DRAM sales and NAND sales to continue to rise.

Reaction: Micron Technology Inc NASDAQ: $MU 

March 23, 2018 Close $54.21 ▼ 4.71 (-7.99%) 

Micron, like NVidia has been volatile as you would expect being major stocks in the nasdaq index but also major benificiaries of the cryptocurrency phase. Micron has also been a major player in other technology hotbeds in 2017 such as machine and deep learning.

NAND Memory Pricing Concerns Hit $MU Share Price

After an initial bump in the share price following the earnings release with Micron's DRAM sales surging and NAND volumes aslo increasing. What concerned investors is NAND prices which fell to the point where even though volume increased during fiscal Q2, both compared to Q1 and the prior-year period, revenue was down as margins came in quickly.

Micron saw a  near 14% decline in NAND per-bit pricing leading to a 2% drop in adjusted gross margin in the NAND business. The NAND storage segment, which is made up of comprised of solid state drives and other storage products, saw revenue hit 9.4% compared to Q1, operating margin fell 9% to 20%. Given the boom in memory prices though both revenue and operating margin were up year over year.

Another concern is Micron's has not been disclosing its per-bit costs for NAND since Q1, so we don't know any changes there during Q2.  What iniitated much of the selling in the stockmarket Friday was an analyst at Citigroup dropped his rating from buy to neutral, concerned the NAND market could be "rolling over." The price was also affected by the 'China Affect' causing stockmarkets to nervously sell off since tariffs were announced. NAND pricing moves with supply and demand, oversupply can lead to sharp declines in price. With these overhanging concerns NAND pricing is at risk deteriorate further going forward.

Micron Technology earnings Q2 2018

Outlook

  • For the third quarter of 2018, Micron estimates non-GAAP revenue to be in the range of $7.20-7.60 billion.
  • On an adjusted basis, the company expects earnings to be in the range of $2.83 +/- $0.07 per share.

 DRAM Production Expansion a Risk or Opportunity?

Micron announced during it's earnings call plans to expand its production facilities with its fiscal 2018 capital expenditures would be at the upper end of its previous guidance range. This is from the expansion additional clean room spaces in Singapore and Japan. The new Japan space is expected online for production at the beginning of 2019, with Singapore online at the end of this year.

The concern for investors from the expansion is fed by NAND prices becoming evident in DRAM pricing. That is that what happens if demand growth lags supply growth and the high prices reverse? We have seen with NAND hoeprices can plunge and with that profits. There lies the risk with expansion, what if Micron is overestimating demand?

The other supply overhang is Samsung adding to supply with their new production space, the risk is does taking advantage of higher deamnd by Micron and suppy pushing down prices dramatically or can balance be achieved? The hope for the tech giants is the demand for DRAM chips stays ahead of supply with new technology and markets.

That is the risk and Friday's share price losses of eight percent tell us the concern is real.

Note: This story was updated after Micron reported earnings

Preview (Prior to Release)

Analysts see DRAM and NAND trends solid for 2018 with supply chain checks indicating positive DRAM ASP trends which havecontinued in $MU’s previous quarters driven by robust server demand and improving mobile demand. The server market accounts for around 30% of MU’s DRAM revenue. 

Analyst $MU Ratings 

  • Credit Suisse Outperform rating with a $70 price targ.et.
  • Evercore ISI Outperform rating with an $80 target.
  • Nomura Instinet Buy rating and a $100 target
  • KeyCorp Overweight rating and a $65 price target.
  • Susquehanna Positive rating with an $80 price target.
  • Deutsche Bank Buy rating and a $65 price target.
  • Mizuho Buy rating with a $66 target price. 
  • Nomura  Buy rating

Memory prices had been levelling off last quarter, which saw both $NVDA and $MU pull back from lofty levels, only to resume their march higher after selling off to new all time highs. What we do know going back six quarters Micron has reported blow out numbers. Will this change? With Micron the question investors have been dealing with has that boom already peaked?

$MU closed Friday at $60.68 and has a 52-week range is $25.40 to $53.42

Source: Micron, Alphastreet

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