What Happened

Micron Technology reported earnings after the market closed on December 18, 2019. They just barely beat earnings and sales estimates, though both these numbers were lower than a year ago. Gross margins, key in the highly-competitive world of memory manufacturing, fell again, coming in at 26.6% versus a predicted 28.7%. Watch out to see if Micron's margins continue to fall with along with revenue.

(Below is Investopedia's original earnings preview, published 12/11/19)

What to Look For

Micron Technology (MU), one of the top producers of data storage and computer memory products, has drawn attention by announcing the first 1TB microSD card for use in cloud-managed video surveillance applications. But will the company's efforts to upend the network video recorder market impact its gross margin? Micron reports earnings on December 18, 2019 at 4:30 p.m. Eastern for fiscal Q1 2020. Investors should look to gross margin as a key metric to evaluate Micron's success over the recent quarter. In the past year, Micron stock has significantly outperformed the S&P 500. Analysts expect the company to post a sharp decline in revenue and gross profit in the first quarter compared to a year earlier.

Micron 1-Year Stock Performance Vs. S&P 500
Source: TradingView.

Micron posted outsize year-over-year (YoY) revenue growth in its first quarters in both fiscal 2018 and 2019, as well as steady growth in earnings per share (EPS) according to generally accepted accounting principles (GAAP) on an annualized basis from Q1 FY18 to Q1 FY19. But on a quarterly basis, Micron has seen both total revenue and EPS fall throughout FY19, even as its stock has generally trended upward. For the most recent quarter, Micron posted declines of about 42% and 86% YoY in revenue and EPS, respectively, sending the stock into a brief downward spin. Nonetheless, last quarter saw a small upside surprise in both revenue and EPS, which contributed to a sense of optimism among some analysts for upcoming quarters. While Micron stock has since recovered somewhat, analysts expect EPS of $0.42 for the upcoming earnings release, another sharp decline.

Micron Key Metrics
  Estimate for FYQ1 2020 FYQ1 2019 FYQ1 2018
Earnings Per Share $0.42 $2.91 $2.36
Revenue (in billions) $5.0 $7.9 $6.8
Gross Margin 28.7% 59.0% 55.4%
Source: Visible Alpha

Investors considering buying Micron stock should pay particular attention to the company's gross margin, or the percentage of each dollar of revenue that the company retains as gross profit. Higher gross margin indicates that the company is more efficient in its spending and able to reinvest a larger portion of its revenue back into further growth. This is particularly important for Micron, because data storage products are effectively commodity goods. Therefore being able to maintain margins by keeping down production costs is especially important. On a quarterly basis, Micron maintained strong gross margin figures from early in FY18 until Q3 FY19, when its gross margin began to decline sharply. Analysts expect this trend to continue in the upcoming Q1 earnings release.

One reason for shifts in Micron's gross margin may be related to a broader slump for the memory card industry as a whole. This has left Micron and its competitors with declining sales and earnings and rising inventory levels. Fortunately, Micron is adept at making adjustments to accommodate these trends, initiating cost improvements and consolidation efforts to help keep operating margins steady in spite of a slump.

The upcoming earnings release may be an indicator of whether the memory industry has begun its long-anticipated recovery. Nonetheless, Micron's EPS, revenue and gross margin may face enormous pressure in the next year due to oversupply in the market and the addition of Chinese firm ChangXin Memory Technologies. ChangXin competes in the dynamic random-access memory (DRAM) space that Micron traditionally has dominated.