Micron (MU) reported roughly in-line quarterly results yesterday after the close. The biggest problem was fiscal second quarter results that came in below consensus expectations. What may be more concerning is that Micron’s gross margins are now deteriorating at a rapid pace based on guidance.
Additionally, there are more signals that DRAM and NAND prices will continue to fall once the new year begins and that may weigh on the stock. Technical charts suggest the stock has further downside risk as well. However, there are signs the stock may be nearing a bottom.
The company is guiding fiscal second quarter revenue to $6 billion at the mid point vs. analysts consensus estimates of approximately $7.1 billion, a big miss. Meanwhile, the company guided earnings per share at the mid-point to $1.75, +/- $0.10, per share. The big hit comes to the gross margins, which are forecast at 51.5% at the mid point. This is down from the fiscal first quarter results of 58.3%.
Gross Margin And The Stock Price
Over the past 10-years Micron’s stock has been highly correlated to its gross margins. The correlation between the two metrics is 0.94 with an R^2 of 0.89, making the two highly correlated. The company guided for the fiscal second quarter gross margins significantly below the prior quarter and are trending the wrong way, a negative sign for the stock.
(Data compiled using Ycharts)
What may be even more worrisome are recent articles out of Digitimes that suggests that NAND prices may fall 10% sequentially in the first quarter of 2019.
The technical shows that the stock has fallen in a steep downtrend since peaking in early June. Now the stock is trading around a critical level of technical support at $32.50. Should the stock fall below that level of support the shares may fall to roughly $29.
The relative strength index also has been falling sharply, which suggests the stock may continue to fall.
However, if the stock can hold support around $32.50, it could find itself in a position to rise to around $36.50.
Volatility Still High
The options market is expecting the stock to remain volatile over the next month. The long-straddle options strategy suggests the stock may rise or fall by as much as 11% by expiration on January 18 from the $34 strike price.
There are Some Positives
The company noted on its conference call it expects to see healthier demand in the second half of calendar 2019 and is forecasting NAND demand to accelerate. So while the company faces short-term headwinds of lower DRAM and NAND pricing, there are signs that those trends may begin to turn over the next few months.
Additionally, the technical chart suggests the stock may be nearing a bottom. The next level of technical support around $29 is strong and has acted as a healthy support/resistance zone as the stock was rising. It may offer a turning point for the stock. Additionally, despite the RSI still in a steep long-term downtrend, it’s also showing signs of beginning to turn higher.
While the outlook for Micron appears to be bleak in the short term, there may be hope in the longer term should the positive trends the company mentioned on the call materialize. For now, it would seem the path of least resistance is likely lower.
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