Micron Mired in Murky Memory Market – Cutting Capex 30%- 2020 Challenging

• Solid Quarter but soft Outlook
• Recovery Slow- Future Cost Downs Harder
• Demand slightly ahead of supply-Shelf Stuffed?
• Bouncing along the Bottom of the Cycle

Results ahead of expectation but guide behind expectation
Quarterly results were slightly better than street expectations at $0.56 EPS and $4.87B in revenues however guidance is for $5B +-$200M in revenues and $0.46 +-$0.07 in EPS which is well below expectations. While there may be some normal “sandbagging” of forward looking guidance even with that assumption its an unimpressive guide.

Disappointment that we are not yet at low tide
Investors are clearly not happy that the guidance does not yet indicate a bottoming of business. The stock was priced to perfection and a quarter guide that suggested being past the bottom of the cycle was also baked in to the high valuation.

We have been saying for a long time that this will be a longer, slower, shallower recovery. Investor and analyst hopes had gotten way ahead of reality. The reality is that we still have excess supply and demand is lukewarm with a number of potential risks in the market that add to uncertainty.

Cutting Capex 30% in 2020, front end cuts are deeper than back end
The company said what we have heard before and have been talking about for a while now……Capital spending will be down by 30% in 2020 versus 2019. Worse yet, the spending will be more focused on back end , assembly and test as well as buildings and less on front end equipment.

If we had to guess we would bet that front end equipment purchases are down at least 40% maybe as much as 50% while back end may only be down 20% or less.

This is obviously very negative for Lam and Applied and to a lesser extent ASML and KLAC. This additional data point of front end being cut more than 30% is obviously incrementally a lot more negative than some analysts and investors had been hoping for.

Wafer starts still being cut, bit growth will come from technology advancement
Micron made it clear that they are still idling capacity and wafer starts continue to come down as machines come off line as plugs are pulled. They said that bit growth will come from density (technology) increases not wafer start increases and that technology increases are enough to keep up with the needed teenage demand.

This is something we have been repeating for a while now, that bit growth can be met with Moore’s Law. So we can read this as selected technology only purchases, focused on pushing Moore’s law forward.

Further cost reductions will be more difficult in 2020
The company was also very clear that the aggressive cost of manufacturing reductions seen in 2019 will not be repeated in 2020. It sounds as if we are past the “easy” technological advancements are are now into more difficult technology changes that will be slower, harder and more costly.

We would read this as the company telegraphing that gross margins will be harder to come by in 2020 as costs will not come down as quickly as pricing.

Is Channel Stuffing going on?…yes
We have been warning of potential channel stuffing going on as Chinese buyers may be stocking up on fears of being cut off or buyers who frequent Samsung may be concerned about Japan cutting them off from critical materials.

Micron said this was going on but could not quantify how much of demand was this “mirage demand” due to stocking up.

Continued progress on 1Z and 96/128 NAND
Micron has made excellent progress in moving the technology ball forward and executing on all these new fronts.

These many advancements are clearly why Micron has been able to keep costs coming down ahead of falling prices. In past cycles, price drops always got ahead of cost drops but Micron has done a better job in this down cycle.

This has kept the company in much better shape on a competitive basis than in previous down cycles. Micron is likely a lot more competitive with the industry leader , Samsung, and claims to be ahead in some aspects.

Huawei is still “No Way”
Huawei is still on the “verboten” list even though Micron has applied for permission. News coming out today makes it seem as if the odds of Huawei being taken off the entity list or waivers being granted seem very low.

We would assume little to no business from Huawei going forward. If somehow this changes we would consider it a lucky break.

Still in wait and hope mode…maybe less hopeful
Micron’s stock has been in “high hopes” mode as expectations for a recovery got well ahead of themselves along with the stock price. We will obviously see a return to the reality of a slow recovery out of a murky bottom with an ill defined turning point.

We could see the run up in overall semi stocks reverse a bit as the wind comes out.

The stocks
There will likely be a significant correction in Micron’s stock price which was well ahead of where it should have been.

If we are at a run rate of $2 per year in EPS and were closing in on a $50 stock price we are at a 25 multiple which is obviously hard to support even at bottom numbers. There is likely support at the $40 level but we would not be interested in buying unless and until we got back to a “3” handle.

Collateral Damage
We don’t expect any better report coming out of Samsung as they are in the very same memory market with similar dynamics plus the additional worry of the Japanese embargo and now what looks like yield issues on their 7NM logic side as well. Samsung obviously gets the same pricing as Micron and even though Samsungs costs are generally lower there is less of a differential in the current down cycle.

Applied and Lam could see a 40-50% cut in business from Micron in 2020, making an equipment recovery all that much harder. While ASML and KLAC are more associated with technology advances than capacity advances there will also see weakness though less as KLA has always been more foundry/logic driven.

It would not be unreasonable to expect a 10% haircut in Micron’s stock price from its recent peak and AMAT and LRCX perhaps a 3-4% cut.

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