Stocks of chip equipment suppliers rise
On June 25, Micron Technology (MU) reported better-than-expected earnings results for the third quarter of fiscal 2019, which sent the stock up 13.3% a day after its earnings release. However, the company reported weaker-than-expected guidance as a result of the US-China trade war.
Micron has cut its fiscal 2019 capex from its originally planned $10.5 billion to $9 billion. It plans to make material cuts to its fiscal 2020 capital spending, which indicates that its capex will be below $9 billion. Despite these cuts, the stocks of semiconductor equipment suppliers Applied Materials (AMAT), Lam Research (LRCX), and KLA Corporation (KLAC) rose 3.8%, 3.1%, and 3.3%, respectively, on June 26. They earn 43%, 79%, and 61% of their revenues, respectively, from the memory market. Let’s see why.
The key takeaway from Micron’s earnings was the demand forecast for the NAND (negative-AND) and DRAM (dynamic random-access memory) markets.
Micron earns 64% of its revenue from the DRAM market. In its previous quarter’s earnings in March, Micron estimated that its DRAM industry bit demand would grow in the low to mid-teens in 2019. In its latest earnings results, it revised this estimate to the mid-teens, as it sees DRAM inventories normalizing for cloud and graphics customers and Intel’s CPU (central processing unit) supply shortage easing.
Moreover, Micron’s DRAM shipments remained sequentially flat, and DRAM average selling price declines slowed to 20% from 25% in the previous quarter. All these signs show that DRAM demand is improving. Hence, Micron has made no further production cuts in DRAM—good news for equipment suppliers, as investors were expecting the worst.
Micron earns 30% of its revenue from NAND. The company maintained its estimate for NAND industry bit demand growth in the mid-30% range in 2019. However, it’s reducing its NAND capacity by 10%, greater than its previous capacity reduction of 5%, in order to bring supply in line with demand.
This reduction came as welcoming news to NAND chip supplier Western Digital (WDC), sending its stock up 7.3%. Analysts believe that capacity reduction by Micron will slow NAND price declines and help Western Digital remain profitable.
Signs of improvement in demand and supply in the memory market have sent semiconductor equipment suppliers’ stocks up.