Once again Micron (Nasdaq:MU) has disappointed investors relative to expectations, but that may not really be all that important anymore. The biggest question is whether the memory space has dug out its trough for this cycle or is about to do so soon. For all of the consumer electronics headwinds, the fact remains that Micron is still one of the stronger players, and demand will rebound eventually. Although Micron is really not a good candidate for buy-and-hold, it may have value as an expiration-free call option on a broader sector recovery. (To learn more, check out Options Basics.)
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Do Poor Results Matter?
Micron posted results that are frankly not very impressive and once again missed average expectations (making it three in a row). Revenue fell 7% from the year-ago level and about 2% from the prior quarter. It wasn't all bad news, though. DRAM revenue was basically flat (as double-digit increases in volume offset double-digit decreases in price), but NAND flash product revenue rose about 6% from the fourth quarter.
Profitability likewise looked sick. Gross margin slid a bit from the Q4 and dropped around 5 percent from last year. The company continues to post a GAAP operating loss, even though the NAND business was actually profitable for the quarter and showed good sequential margin improvement. (For related reading, see Zooming In On Net Operating Income.)
Throw It All in the Trough
Maybe Micron's results were terrible, but does anybody care? This is pretty much kitchen sink time in the memory space, and analysts and investors really aren't looking for strength. Conditions were bad going into this quarter, as PC makers like Dell (Nasdaq:DELL) continue to see poor volume and other consumer electronics like tablets, phones, MP3 players, game systems and the like are hardly flying off the shelves.
For all of the excitement over Apple (Nasdaq:AAPL) phones or Amazon (Nasdaq:AMZN) tablets, it's just not a great market. Chip volumes are still strong - Micron saw mid-teens bit growth in DRAM and low 20s growth in NAND - but pricing is lousy. The Thai flooding and resulting interruptions to hard drive manufacturers like Seagate (Nasdaq:STX) and Western Digital (NYSE:WDC) only made matters worse.
If there's good news, it's that companies like Micron, Samsung and Hynix all seem to think that the market is near the worst of the cycle. If that proves true, then this is a much better trough for Micron than in cycles past and a solid sign of progress for the enterprise. It's also worth noting that prices for some types of memory dropped almost to the level of variable costs, and that's an intense pressure on smaller operators.
Rambus Off the Table
A little more than a month ago, Micron also got a major reprieve. A jury in the patent infringement/antitrust case launched by Rambus (Nasdaq:RMBS) returned a not guilty verdict in a case that could have put the company on the hook for a multi-billion dollar payout. Rambus isn't likely to give up yet, but appeals tend to be cheaper and more straightforward, and it seems reasonable to think that Micron will prevail.
The Bottom Line
Over the long term, investors have been far better served by just owning the Nasdaq 100 index than owning Micron shares, and I suspect that the same will be true over the long term to come. That said, Micron has often outstripped the market during bull markets and recoveries, and that, too, seems like a likely bet to make for the future.
Own SanDisk (Nasdaq:SNDK) for its own organic share growth potential or own Samsung for its position as a growing tech colossus, but consider Micron as an expiration-free call option on a tech recovery. Chip companies off all stripes are seeing tough conditions today, but both Altera (Nasdaq:ALTR) and Texas Instruments (NYSE:TXN) managements believe that the end of the bad times is in sight. If that's true, even if the timing is inexact, Micron may outperform. (For related reading, see A Primer On Investing In The Tech Industry.)
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.