2020 capex likely down at least 20% vs 2019 DRAM & NAND price drops versus slowing capacity. Investors happy cause it could have been worse.
Micron reported $1.05 in Non-GAAP EPS beating street consensus of $0.79 by $0.26. While this looks like a big beat, we would remind investors that estimates for the quarter were about $1.35 just four short months ago before further previous downward guidance. Revenues came in at $4.79B versus reduced street expectations of $4.7B.
Guidance is for revenues of $4.5B +-$200M and EPS versus street of $4.56B and EPS of $0.45+-$0.07 versus street of $0.70. Guidance is obviously low but likely “sandbagged” just like the reported quarter.
Still cutting wafer starts to reduce supply to prop up pricing
Micron continues to cut wafer starts another 5% to try to reduce the oversupply condition which was worsened by Huawei. The company made it clear that the market remains “oversupplied” even though the oversupply may be lessening.
We would imagine that Micron and other memory makers will continue to cut output until we getting into a better supply/demand balance and pricing starts to recover.
This supply/demand cyclicality is typical of many commodity like markets such as oil and other global markets and it sound come as no surprise to seasoned investors that the down part of the cycle always takes a significant amount of time to work off the excess capacity.
It should also be abundantly clear that when you are cutting capacity your capital spending to increase capacity goes to near zero levels. Spending on “technology buys” continues, but raw capacity they don’t need right now.
2020 capex to be “meaningfully down” versus 2019
Micron has already cut 2019 capex from the prior $10.5B to the current expected $9.0B with a current run rate of about $8B. While Micron did not specifically quote 2020 capex plans as they are still in flux, they did say “meaningfully down” from 2019’s $9B. We think “meaningfully ” is code for 20% or more, not just 10%. That would suggest getting down to a “7” handle or lower. That would be down well over 30% from the peak but not as far down as Samsung which drove its capex off a cliff.
Makes it really hard for 2020 to be an “up” year for semicap
With Micron clearly cutting 2020 versus 2019 and Samsung in the exact same boat, we can’t imagine any memory maker who will be planning on a capex increase in 2020 which would imply we are not going to see a recovery that some optimists are suggesting.
Months ago we said that the current downcycle would be longer and deeper than previously expected due to China and only in the last couple of weeks have most analysts finally figured that out. Many are still in denial by suggesting that 2020 will be up significantly. Its not like logic and foundry are going to double spending to offset the ongoing memory weakness…its just not going to happen……so get over it.
Bit growth continues without capex increasing
What most investors and many junior analysts don’t get is that memory bit growth can continue without an increase in capex and can in fact see strong bit growth in a declining capex environment. By continuing to follow Moore’s law, we get more bits in less silicon without increasing capex proportionately.
We have long held to the view that there are in fact two cycles underlying the industry. The technology spending cycle and the capacity spending cycle. Technology spending (to further Moore’s law) usually goes on almost no matter what while capacity spend can go to near zero when the industry is over supplied such as it is now.
Right now Micron and Samsung can easily keep up with bit growth just with technology improvements to the next node.
Technology spend causes semicap share shift
When capex is focused on technology rather than capacity, more money tends to be spent on yield management and lithography which are the two primary drivers of Moore’s law. This suggests that spending related to KLAC and other metrology/inspection companies as well as litho spending, with ASML, tends to hold up better than basic process tool sales
The Stocks- the “it coulda been worse” rally
Micron’s stock was up 8% in the aftermarket due to the fact that it wasn’t as bad as it could have otherwise been even though it was worse than expected 4 months ago. Investors don’t seem to have quite latched on to the great miss on forward guidance. Basically anything is better than a miss.
We would not be surprised if semicap names are up in a sort of “kneejerk” reaction that will be positive across the chip market even though the news for semicap names is very negative given the capex guidance for 2020 being down which blows a hole in the “capex recovery in 2020” theory. But short sighted investors and analysts will likely latch on to the hope of the beat forgetting how reduced the expectations were.
We think the reduced 2020 capex comments clearly reflect the severity of the oversupply situation and Micron is voting with its feet in saying that things won’t get better enough in 2020 to warrant a capex increase. We agree. We think memory pricing will continue to stabilize as output continues to be cut but we see no huge rebound in demand that would force memory makers to increase capex any time soon.