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Micron’s High Inventory, Falling Capital Spending Are Worrisome

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Micron stock could fall as investors price in inventory

On July 25, Micron Technology (MU) stock rose as high as 10% in after-hours trading as investors reacted to its better-than-expected fiscal 2019 third-quarter earnings results. However, the stock is likely to fall by the end of this week as investors price in its weak earnings guidance, rising inventory levels, and falling capital spending.

During its last quarterly earnings results on March 20, Micron stock rose 9.6% a day after the results as its earnings beat analysts’ estimate. However, it fell 11% the next day as analysts downgraded it on its weaker-than-expected guidance.

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Inventory

The company’s memory chip inventory has been rising continuously, driving down memory prices after two years of growth. Micron’s inventory rose 12% sequentially to $4.91 billion in the third quarter of fiscal 2019, equating to 151 days of inventory outstanding, up from 143 days in the previous quarter. Its inventory rose even though it wrote down $40 million worth of inventory related to Huawei.

Micron’s inventory has been growing sequentially for the last six quarters as the memory market faces oversupply and its customers absorb their existing memory inventories. The company expects inventory levels to remain high in 2019 as industry supply and demand fall into balance. Micron noted that some of its customers’ inventories were normalizing, which could increase demand in the second half.

Capital expenditure

Micron is further lowering its fiscal 2019 capital spending to $9 billion to reduce its NAND (negative-AND) supply by 10% and its DRAM (dynamic random-access memory) supply by 5% and bring it in line with demand. Micron stated that it would be making meaningful cuts in its fiscal 2020 capital spending to help improve its demand-supply balance.

Micron expects DRAM inventory to start falling by the end of 2019. There are also fears that falling memory prices will force memory chip makers to write down their inventories by the end of the year. However, Micron doesn’t expect inventory write-downs as long as its gross margins remain positive.

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