What Happened

Micron Technology reported higher-than-expected sales and earnings exactly matching analyst estimates of $0.36 a share. Micron's gross margin disappointed, falling a few points below expectation, and significantly lower than this time last year. However, in what may be a hopeful sign, margins are up from Micron's previous quarter, and the company's outlook for next quarter included a further rise. Markets were happy with the performance, with Micron's stock rising several points in aftermarket trading.

(Below is Investopedia's original earnings preview, published March 19, 2020)

What to Look for

Micron Technology Inc. (MU), one of the leading manufactures of DRAM and SRAM memory chips, saw its shares soar in December on optimism that global risks were fading after the U.S. and China reached the "phase one" trade deal. What a difference a few months makes. Micron shares are now tumbling as the coronavirus pandemic has hammered economies in China, the U.S. and globally, triggering fears of a broad recession. Investors will be watching for any signs that Micron has been affected by these disruptions when the company reports earnings on March 25, 2020 for Q2 FY 2020, which ended in February.

Investors are likely to focus on a key Micron metric, gross margin, a sign of operating efficiency for the company and other memory chip manufacturers. Analysts currently expect a grim Q2 report, estimating that both earnings per share and revenue will fall for the fifth straight quarter year-over-year (YOY). Micron's gross margin is expected to improve compared to the previous quarter, but still be down dramatically from the same quarter a year ago.

Despite this weak performance, Micron's stock has outperformed the market. Its total return for the past 12 months is -13.7%, compared to -16.5% for the S&P 500.

One Year Total Return for S&P 500 and Micron
Source: TradingView.

Micron's 2019 fiscal year ended August 29 and its Q1 2020 ended in November. The U.S.–China trade deal in December brought hope that demand for memory chips would increase, helping put an end to the supply glut weighing down industry prices. And it boosted Micron's shares despite year-over-year (YOY) declines in revenue and adjusted earnings per share (EPS) in Q1 FY 2020. It was the fourth consecutive quarter of YOY declines for both metrics and it was the lowest quarterly adjusted EPS the company has reported in three years, at $0.48. On a positive note, Q1 adjusted earnings surprised to the upside.

More declines may be ahead in Q2 FY 2020. Revenue is currently expected to reflect a YOY decline of 19.6% as adjusted EPS falls 78.9%. While those are lower YOY declines than during Q1, they still reflect a sector struggling with glut-level prices.

Micron Key Metrics
  Estimate for Q2 2020 (FY) Q2 2019 (FY) Q2 2018 (FY)
Adjusted Earnings Per Share $0.36 $1.71 $2.82
Revenue (in billions) $4.7 $5.8 $7.4
Gross Margin 31.7% 49.1% 58.1%

Source: Visible Alpha

The decline in memory chip prices has also been weighing on Micron's gross profit margin (also called gross margin), a key metric that reflects gross profit (sales minus cost of goods sold) as a percentage of total sales. A company can increase its gross margin by either increasing sales or cutting costs, or a combination of both. Memory chips are essentially commodity goods, with little quality differentiation between chips manufactured by different companies. This means that manufacturers have little pricing power, so the primary way to boost margins is by keeping costs low, especially in periods of weak sales.

Micron's gross margin has fallen drastically - by more than half - from its recent peak of 61% in Q4 of 2018 to 26.6% in Q1 FY 2020. Indeed, Q1 marked the fifth straight quarterly decline in this key metric on a sequential basis. Analysts expect Micron's gross margin to rise to 31.7% for Q2 FY 2020, an improvement from Q1. But it still will be down sharply from the same quarter a year earlier.  That quarter-to-quarter margin improvement may do little to boost overall profit and revenue amid weakening demand in the case of a global recession. Citigroup analyst Christopher Danely is forecasting the possibility the semiconductor sector could see earnings fall as much as 70% on average if the global economy enters a recession.