Micron Technology (MU -2.00%) is expected to release its fiscal 2020 second-quarter results on Tuesday, March 24, and the numbers aren't going to be pretty. The chipmaker has been struggling as a result of an oversupply in the memory industry as demand diminished last year. Investors can expect to see the impact of that downturn on Micron's upcoming results, but their eyes will be fixed somewhere else: the guidance.
When Micron released its first-quarter results in December last year, management said that it was expecting to hit a bottom in the second quarter of 2020. Now, it remains to be seen if the company actually arrived at the bottom that it was anticipating. Business conditions around the globe have been deteriorating in light of the COVID-19 outbreak, and Micron could fall prey to the same.
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Micron faces an uphill task
Wall Street expects $4.69 billion in revenue from Micron, which is slightly higher than the mid-point of the company's guidance range of $4.5 billion to $4.8 billion. Non-GAAP earnings are expected at $0.37 per share. Again, this is higher than the mid-point of the company's wide earnings guidance range of $0.29 to $0.41 per share.
The bad news for Micron investors is that the company's guidance is based on the assumption that "there are no perturbations to the demand environment due to macroeconomic conditions or trade-related developments." What's more, the company was witnessing a recovery in DRAM (dynamic random access memory) demand in the second half of 2019.
Micron was counting on a faster increase in memory industry demand compared to supply. That would have turned memory pricing in Micron's favor, and helped the company stage a comeback. But it looks like the end-market conditions may take a turn for the worse and force Micron to issue guidance that investors may not like.
Demand for smartphones in China, for instance, has taken a huge beating of late as the novel coronavirus outbreak brought the country to a grinding halt. According to data from the China Academy of Information and Communications Technology (CAICT), smartphone sales in China in February were down nearly 55% year over year.
IDC estimates that China's first-quarter smartphone shipments could plunge 40% in the first quarter of 2020. On a global scale, Strategy Analytics predicts that smartphone shipments could drop by 10%, or 100 million units, this year despite the ongoing roll-out of 5G networks across the globe. That's bad news for Micron's mobile business unit (MBU), which reported revenue of $6.4 billion in fiscal 2019, accounting for around 27% of total revenue.
Micron sells both mobile DRAM and NAND flash storage for smartphones, and demand for such products is likely to decline if smartphone makers cut down on production. But this is not the only headwind for Micron.
The company's compute and networking business unit (CNBU) generated nearly $10 billion in revenue last year -- over 42% of total revenue. Micron supplies its DRAM and NAND chips to several verticals including PCs, servers, graphics, and networking through CNBU.
According to Bank of America analyst Simon Woo's supply chain checks in China, orders for new memory chips from both smartphone and PC original equipment manufacturers (OEMs) have started dropping. So there's a good chance that the demand recovery Micron has been witnessing over the past few months could be derailed thanks to the spread of the virus that causes COVID-19.
But there's still some optimism on the Street
There are a few Micron bulls who still see the company riding out the novel coronavirus-induced downturn. KeyBanc Capital Markets recently reiterated its overweight rating on Micron stock, along with a $63 price target that indicates 60%-plus upside from current levels.
The firm believes that supply disruptions and strong demand from data centers could lead to improved memory pricing. KeyBanc Capital Markets analyst Weston Twigg opines that memory demand will be driven by servers as more people start working from home during the outbreak. While that may create server demand, Micron investors shouldn't forget that data-intensive industries such as airlines, transportation, and retail, among others, are expected to take a huge hit.
As a result, server demand from those industries may drop. And employees working remotely or organizations carrying out meetings online may not prove enough to boost memory demand.
All in all, Micron Technology's turnaround may have been pushed back, and the tech company's upcoming earnings report could confirm the same.
