MarketWatch First Take: Micron earnings prove the doubters wrong again

Micron Technology Inc. once again countered all the doubts surrounding the stock Wednesday, as executives forcefully contended that the current strength in memory markets is not just a cyclical upturn.

Micron MU, -0.51%  on Wednesday reported strong profit and sales gains with a forecast that showed confidence that demand for memory chips will continue, along with higher prices of those components. After Micron’s chief financial officer gave the fourth-quarter forecast, shares reversed from a slight dip to a gain of nearly 3% in later trading, which would add to a 43.5% gain so far this year. For comparison, the S&P 500 index SPX, +0.17%  is up 3.3% in 2018.

The forecast was huge because it attacked the biggest shadow hanging over Micron’s surging stock: the constant fear that ongoing strong demand for memory chips will abate. There are a variety of potential reasons that could happen, including the demand for smartphones peaking; sales in China falling with the absence of ZTE, effectively shut down by a U.S. Commerce Department ban, and a Chinese investigation into memory prices; and, scariest of all, that companies are hoarding chips to avoid any price increases and ensure supply amid heightened demand, which would lead to a downfall once demand and supply even out.

Micron Chief Executive Sanjay Mehrotra pretty much knocked down those doomsday scenarios Wednesday, though, and tried to get investors to see strong memory chip sales as a constant instead of a cyclical event.

“We see robust demand drivers for DRAM (dynamic random access memory) whether in the data center or mobile or graphics,” Mehrotra told MarketWatch in a brief telephone interview after Micron’s conference call Wednesday. “These applications are all very diversified, the trends of artificial intelligence, augmented reality, all of the new high-resolution imaging, all these trends drive needs for more and more memory. And memory has become essential for these apps. It is about the value that memory enables.”

See also: Micron’s stock has best month since 2013 , reaching highest prices since dot-com bust

Many analysts still tried to get some sort of sense as to when, not if, the current strong memory cycle will end, after Apple Inc. AAPL, +0.44%  and some analysts predicted that DRAM prices could take a hit in the second half. Another hot topic on the company’s call was Micron’s performance in the NAND flash memory market, which did not show price weakness apparent in its rivals’ results.

“Several reports about your largest competitor seeing significant ASP (average selling prices) weakness in their NAND business and I’m just having a hard time trying to reconcile why Micron isn’t seeing this weakness as well?” Romit Shah, an analyst with Nomura Securities, asked in the conference call.

Mehrotra said that Micron is selling more of its higher value solutions and multi-chip packages in its NAND business, which is “really helping kind of keep the pricing healthy.”

Another analyst asked about the possibility of customers buying ahead in case of further price hikes or shortages.

“We do not see trend of building or hoarding product, we don’t see that. But I mean the demand in cloud applications has continued to increase,” he said, adding that a meaningful part of the capital expenditures for cloud operators is “going toward compute and storage and memory.”

Mehrotra is clearly trying to tell investors that the memory market is no longer a cyclical business, saying in his prepared remarks that “the industry we operate within is structurally different than in the past.” With each passing quarter of big gains and confident forecasts, it gets harder to doubt that is the case.  

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