Key Takeaways

  • Adjusted EPS was $0.78 vs. the $0.68 analysts expected.
  • Revenue exceeded analyst expectations.
  • Gross margin was slightly higher than analysts estimated.
  • Strong financial results driven by focused execution and strong end-market demand.

What Happened

Micron's fiscal Q1 earnings and revenue were both higher than analysts forecasted. Earnings growth was especially strong, although slower than the previous quarter. Revenue grew at a more modest pace. The company's gross margin was slightly higher than the level analysts were expecting. The strong results were partly driven by strong end-market demand.

CEO Sanjay Mehrotra said that the company is "in an excellent position to benefit from accelerating digital transformation of the global economy fueled by AI, 5G, cloud, and the intelligent edge."

(Below is Investopedia's original earnings preview, published January 5, 2021.)

What to Look For

Micron Technology Inc. (MU), one of the leading manufactures of DRAM and NAND memory chips, is growing again amid the pandemic-induced rise of the remote-work economy. That's good news after weak demand for memory chips during most of 2019 led to declining sales and earnings. But Micron faces significant challenges, including potentially weaker demand in 2021 and U.S. trade restrictions on sales to Huawei Technologies Co. Ltd. The Chinese tech giant is Micron's biggest customer.

Investors will be watching to see whether Micron can maintain growth in the face of these new challenges and the ongoing COVID-19 pandemic when the company reports earnings on January 7, 2021 for Q1 FY 2021. The quarter ended December 3, 2020 and Micron's 2020 fiscal year (FY) ended at the beginning of last September. Analysts expect adjusted earnings per share (EPS) to increase sharply on rising revenue.

Investors also will focus on Micron's gross margin, a key metric within the semiconductor industry that gauges a chip manufacturer's operational efficiency. Analysts forecast that Micron's non-GAAP gross margin will rise compared to the same three-month period a year ago.

Micron's shares kept pace with the broader market during the first half of the past year. While the stock rebounded with the market following the pandemic-induced crash in early 2020, it lost momentum during the summer months and even gave back some of its gains. But in recent months, the stock has surged and begun to outperform. Shares of Micron have provided a total return of 38.2% over the past 12 months, above the S&P 500's total return of 14.0%.

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

The stock initially fell after Micron reported Q4 FY 2020 earnings at the end of September, despite strong results that beat analysts' estimates. Adjusted EPS rose 91.6%, marking the first year-over-year (YOY) increase in seven quarters. Revenue grew at a robust pace of 24.4%. The results were driven by strong DRAM sales and a significant increase in NAND shipments. Micron's shares began to rebound within a week after the report.

The fourth quarter was a huge improvement from Q3 FY 2020, when adjusted EPS fell 21.9%. That marked the sixth consecutive quarter of YOY declines. However, that decline was not as sharp as in recent periods, and revenue rose for the first time in six quarters, growing 13.6%. But despite initially jumping following the report, Micron's stock traded sideways for the next month before tumbling from early- to mid-August.

Analysts are optimistic that the company will maintain its growth in Q1 FY 2021, but at more modest levels compared to Q4. Adjusted EPS is forecast to rise 40.9% as revenue grows 10.3%.

Micron Key Metrics
  Estimate for Q1 2021 (FY) Q1 2020 (FY) Q1 2019 (FY)
Adjusted Earnings Per Share ($) 0.68 0.48 2.97
Revenue ($B) 5.7 5.1 7.9
Gross Margin (%) 29.5 26.6 58.3

Source: Visible Alpha

The decline in memory chip prices due to a supply glut in 2019 weighed on Micron's gross profit margin, also called gross margin in the industry. This key metric reflects gross profit, which is 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.

The 2019 oversupply of chips led to falling prices, pulling Micron's gross margin down at the same time. After peaking at 61.0% in Q4 FY 2018, the company's gross margin slid to as low as 26.6% in Q1 FY 2020. The recovery in memory chip prices that began in late 2019 helped to boost gross margin throughout the next three quarters. Micron's gross margin climbed to 34.2% in Q4 FY 2020. Analysts forecast that gross margin will be 29.5% in Q1 FY 2021, lower than the previous quarter but still above that of the year-ago quarter.