As you know we've been pretty cautious about fundamentals for Micron (NASDAQ:MU) and semis. We focus on Micron and memory because it's so central to tech. If tech is doing well Micron's doing well and vice versa. When we see weakness in memory prices and bloated inventories, we see a double meaning. Tech and Micron shares and fundamentals both have risk ahead.
Latest Datapoints In Tech
I think it's so critical to objectively look at datapoints all the time. It's good to have a thesis but I think it's important to respect datapoints and technical trends to confirm that you are right.
I know there's a lot of bulls out there on the long-term story, higher cycle EPS, tame industry dynamics. But I think it's tough to ignore the continuously deteriorating near-term fundamentals that we've been pointing out for a few months.
There's more datapoints out lately that continue to confirm this deterioration.
Record High Inventories
Apparently inventories are at seasonally record highs according to Morgan Stanley. They said the most overage is in memory and analog.
The problem with elevated inventories in the face of weakening demand is that at some point that inventory will need to clear. That means revenues will track below demand at some stage.
And "record" inventories means that discrepancy between demand and revenues will be either longer or more painful.
So now we have slowing demand. But at some point soon you'll have companies want to correct their risky higher inventory levels. That will likely cause a domino effect of lower orders through the tech supply chain.
Those slower orders mean slower revenue growth rates, lower guides and stock price risk when companies guide for Q3 and Q4.
That flies in the face of many companies looking for a second half pickup which we've pointed out sounds aggressive.
Micron, Intel (NASDAQ:INTC) and semi-cap equipment companies are looking for a second half pickup. I don't see how that takes shape.
The Latest On DRAM Pricing: "Plunging"
Here's confirmation of the above inventory picture along with a respected industry report, Trendforce, saying DRAM prices will continue "plunging."
"Looking at 2Q19, ASP for 8GB modules have fallen to US$34 in April as seen from the final pricings by Tier-1 PC-OEMs, falling by 20% QoQ. Inventory levels kept rising for DRAM suppliers due to lukewarm trade. TrendForce predicts contract prices will keep plunging under as monthly deals are made in May and June and decline by nearly 25% for the whole 2Q. Server DRAMs, which contribute to over 30% of DRAM shipments, will face an even heavier price pressure."
DRAM price drops sound like they are going to be as bad or worse in Q2. Inventory levels rising pose risk for back half revenue guidance for many in tech.
"TrendForce predicts that the top three suppliers will continue utilizing aggressive quoting strategies in the coming months under pressure from mounting inventory levels."
This means margins will continue to worsen. The "top three suppliers" include Micron.
That and the building inventories means real risk to back half estimates, meanwhile companies have said they expect a back half pickup.
Back Half Pickup?!
Here's what Micron said on their last earnings call,
"We expect growth to resume in the second half of calendar 2019 as we see improvement in our customers’ inventory position."
Please tell me how that's going to happen. Unless everybody's wrong on dropping prices and bulging inventories (as mentioned above), Micron's expectations of "improvement in our customers' inventory positions" is likely going to be off.
Semis (NYSEARCA:SMH) have seen big underperformance of late. You know we've been pretty cautious on the stocks and fundamentals.
I think there's more to come but I'd expect the rest of tech (NASDAQ:QQQ) can play catch up lower first. So we would expect that big underperformance for semis to continue in the very near term.
That said I see no way how many of the semi companies meet their "back half pickup" targets given this constant slowdown and the escalating trade war.
The second half starts in 30 days. I see no way how that pickup is going to magically snap back especially given the inventory build and deteriorating demand.
So I still expect more SMH downside for the back half even from these levels.
But shorter term after a big fast move anything's possible.
Micron Book Value
I understand the argument that Micron is trading near book value. I'm not recommending to short Micron nor do I recommend individual shorts.
I'm looking for stocks that can catapult. I use Micron and memory as a gauge for overall tech demand. Memory is in everything so it's so critical to follow it.
Those who are buying Micron for the book value, I would just say that if our earnings are right we'd expect negative earning quarters. If correct that will reduce cash.
Also with "plunging" prices, inventory valuations likely have to get marked down which can also reduce book value.
I don't think we're through the woods on the valuation story until EPS go negative (which nobody's expecting except us, that I've seen) and the stock stops going down on that.
Then I think a valuation argument can be made.
It was reported today that China threatened to take the gloves off. They just told the US, "don't say we didn't warn you."
The last two times they used that phrase they went to war.
This trade war is escalating which doesn't give me any confidence that we're bottoming any time soon.
Datapoints keep confirming a continued deterioration in tech, semis, and specifically memory. As we've said many times memory is so vital to tech and such a great gauge.
Expectations are for a back half pickup. Semi stocks reflect that risk to some degree. But I think the stocks need to shake off that pressed position by going sideways or higher but then continue that downside into the back half as estimates miss and get guided down.
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