A poor earnings report typically only impacts the company reporting it. However, with Micron Technology (NASDAQ:MU), its fate — at least for the nearer-term — rests in the hands of Intel (NASDAQ:INTC). Despite seemingly positive fundamentals, those who have a heavy position in MU stock should consider a more defensive approach.
First, let’s go over the Intel numbers. For its first quarter of 2019, the semiconductor firm delivered an earnings per share of 89 cents. This was about two cents above analysts’ consensus target. On the revenue front, INTC rang up $16.06 billion, just pipping the consensus estimate of $16.02 billion.
Overall, it was a strong showing for Intel. But after the disclosure, INTC shares tumbled badly. Moreover, they’ve yet to recover, turning in a series of red ink. In conjunction, Micron stock also went volatile. Although the damage to MU wasn’t nearly as bad, its pensiveness at a critical juncture presents a bad optic.
So, what happened? Intel’s leadership team guided down expectations for the full year. Instead of the original estimate of $71.05 billion that analysts expected, management now sees $69 billion. This downgrade also represents a conspicuous decline from 2018’s sales haul of $70.8 billion.
But why this issue matters to MU stock is the character of the revenue downgrade. With Qualcomm (NASDAQ:QCOM) seizing control of the 5G mobile space, Intel is out. Instead, they’re focusing on the burgeoning data center business. However, that business suffered a 5% year-over-year revenue decline.
Obviously, that puts Intel in a tough spot; hence, the cratering in INTC. But the fallout also has the potential to sink Micron stock. Given the wild semiconductor market, MU also depends on the data center. If that goes, it’s trouble for everyone.
Cruel Supply Picture Threatens MU Stock
One of the primary reasons why Intel incurred such a steep erosion in value was the revenue downgrade’s surprising nature.
In the technology space, you can’t go for one second without hearing about the cloud. The ability to store vast amounts of data online, as well as conduct several operations through a shared platform, is a profound innovation. But what powers this groundbreaking development? Data centers.
Logically, then, most folks expected data-center-based demand to rise. Multiple industry reports suggested that data centers were climbing feverishly not just here, but globally. Again, this made sense too. Whoever wins the digitalization race will own the 21st century. And all of this boded well for MU stock, where the underlying company provides the necessary memory chips.
But it all came crashing down with Intel’s Q1 earnings report. While data centers remain a viable opportunity, their star apparently streaked too hot, too quickly. What we now know is that this segment is flooded with inventory. Because of this unfavorable dynamic, Intel adjusted down its expectations.
What they’re really doing is bracing for a rough landing. Basic economic theory teaches us that oversupply necessarily depresses demand. Regarding Micron stock, the semiconductor firm’s pricing model goes out of whack.
MU has two money-makers: DRAM and NAND flash-memory chips. NAND is incredibly cheap compared to DRAM, although DRAM has better performance. Due to the attractive pricing, many data centers gravitated toward NAND chips.
But to increase margins, Micron introduced 3D XPoint, which featured better performance than NAND, but was cheaper than DRAM. With this new product, management could split the vast pricing gap, potentially lifting MU stock in the process.
However, data centers sitting on a memory-chip supply glut would negate any efforts toward new products or pricing strategies.
Delicate Environment for Micron Stock
Although it’s tempting to do so, don’t just focus on data centers. Micron stock also has geopolitical considerations. For now, icy U.S.-China relations benefit MU in that President Donald Trump administration offers a protective stance. But if the trade war finds a resolution, we’re back to a cutthroat environment.
In the immediate-term, I’m cautious on MU stock. Although I remain bullish long-term, you must respect the fundamental headwinds. Also, you’ve got to heed the technical warnings. The high of the Feb. 25 session represents horizontal resistance. Around this level, Micron has not traded convincingly.
Based on the Intel earnings report and industry data, we may see MU stock slip substantially. But if it does, I wouldn’t panic. Micron has many other demand channels to feed. However, the company has to first negotiate the upcoming pothole.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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