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Intel’s Guidance Cut Is Bad News for Micron and Western Digital

Timothy Green, The Motley Fool

PC and server chip giant Intel (NASDAQ: INTC) gave investors quite a shock when it reported its first-quarter results on Thursday. While the company beat expectations, it slashed its full-year outlook. Intel now expects its total revenue to decline for the year, mainly due to lower sales of its data center chips.

While this is obviously bad news for Intel, especially with competition from Advanced Micro Devices set to ramp up later this year, it may be even worse news for Micron Technology (NASDAQ: MU) and Western Digital (NASDAQ: WDC). Here's why.

Trouble in the data center

Micron manufactures both DRAM chips, which are used as the main memory in PCs, servers, and mobile devices, and NAND chips, which are used for data storage. Markets for both chips are going through major corrections, with significant price drops causing Micron's revenue and profits to plunge.

Western Digital sells hard-disk drives and solid-state drives, and it manufactures NAND chips via its 2015 acquisition of SanDisk. Western Digital has also been feeling the pain of slumping NAND chips.

Intel manufactures NAND chips, and what the company said about the NAND market during its earnings call throws some cold water on the idea that prices are close to bottoming out. Intel's results were hurt in the first quarter by "incremental NAND pricing weakness," according to CEO Robert Swan, and the company is anticipating "an incrementally more challenging NAND pricing environment," which will hurt its full-year results.

Exactly how bad is it out there in the NAND market? Fellow manufacturer SK Hynix reported a staggering 32% quarter-over-quarter decline in NAND average selling prices in the first quarter. In just three months, SK Hynix saw prices crash by nearly one-third.

Servers in a data center.

Image source: Getty Images.

On top of tumbling NAND prices, general chip demand from data center customers is weak as they grapple with excess inventory. Intel expects a mid-single-digit revenue decline this year for its data center group, following years of that business acting as the company's growth engine.

"Demand pressure is particularly evident in our data center business, where we are seeing a continuing inventory correction in enterprise and comms and capacity digestion among cloud service providers who ramped consumption strongly in 2018," Intel CFO George Davis said during the earnings call.

Intel underestimated how bad the situation was, according to Swan: "The data center inventory and capacity digestion that we described in January is more pronounced than we expected, and China headwinds have increased, leading to a more cautious IT spending environment."

Expect rough results to continue

Micron is already expecting its fiscal third quarter, which ends in May, to be rough. At the midpoint of the company's guidance range, Micron expects revenue and non-GAAP earnings per share to crash 38% and 73%, respectively, on a year-over-year basis.

Western Digital will report its fiscal third-quarter results on April 29, and it won't be pretty. The company sees revenue between $3.6 billion and $3.8 billion, and non-GAAP EPS between $0.40 and $0.60. At the midpoints of those ranges, revenue will be down 26% and non-GAAP EPS will be down 86%.

With Intel predicting further NAND pricing deterioration, along with a worse-than-expected data-center demand environment, Micron and Western Digital may not be out of the woods anytime soon.

Micron CEO Sanjay Mehrotra said during the last earnings call in March that the company expects data center growth to resume in the second half of this year as customer inventory positions improve. And Intel is still optimistic that demand will improve in the second half. But growth in memory-chip bit volumes doesn't mean that prices will rebound. If demand continues to lag supply, the pricing environment will remain weak.

While it's impossible to say exactly when the memory chip markets will bottom out, Intel's commentary suggests that a lot more pain is ahead for memory chip companies like Micron and Western Digital.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool is short shares of Western Digital. The Motley Fool has a disclosure policy.