-Micron’s Q2 (February) earnings call revealed several important data-points that marked a key negative fundamental inflection point shift in the company’s guidance, supply situation, and demand.
-Moreover the impending demise of temporary positive demand drivers such as the Windows XP support end upgrade cycle and Bitcoin GPU mining bubble along with Micron already being a crowded hedge-fund hotel, do not bode well for the stock’s near-term performance.
-Micron enjoyed strong DRAM pricing trends in the past few quarters due to 3 key reasons. Each of these reasons is now either ending or waning:
1. Hynix had a fire in their Wuxi manufacturing plant in China last year, which took off-line a large chunk of global DRAM supply. Micron said this on their conference call:
“In terms of DRAM, it appears that Hynix’s Wuxi fab is back online and it supplies in the market..From what we can tell, DRAM capacity in the industry has normalized following the recovery of one of our competitor’s fabs in China.”
So the largest driver of higher DRAM prices the past few quarters is now ancient history.
2. There has been a temporary PC/notebook upgrade cycle recently ahead of the April 8th, 2014 date when Microsoft ends support for Windows XP. This temporary driver will now be behind us after this week.
3. Bitcoin and Litecoin farming has been a big demand driver for high-end graphics cards which use a stunning 3-4 gigabytes of memory per card. (Source: Link) Many mining setups use 6 cards per motherboard. Demand for these high memory graphics cards will now wane with the recent collapse in the price of Bitcoin.
Conference call quote: “Our graphics business had a record quarter shipping over 100 million gigabits.”
It is highly likely this was the peak quarter in graphics card demand and it will be downhill from here.
-Micron gave anemic guidance for the next quarter. DRAM spot prices have also come down significantly. The company also guided to lower ASPs and production next quarter.
Conference call quote: “On a like-for-like product basis we expect to see some market price reductions for NAND in the third quarter“
-Micron stock is the quintessential crowded hedge-fund hotel. Hedge-funds have piled in as the stock has rallied over 140% in the past year under the “this time it is different” thesis. Famous Tiger cub Viking, Seth Klarman, David Einhorn, and Discovery Capital (-9.3% fund performance in March 2014 according to the Wall Street Journal) are all top 10 holders. In fact according to Goldman Sachs a stunning 102 hedge-funds are long Micron representing 24% of the market cap (Source: Link). That is one of the highest concentrations in the entire stock market.
The problem is once the fundamentals shift, as I think they clearly have from the evidence above, and when hedge-funds and their adoring copy-cats start headed for the exits, the fall can be swift and dramatic. This in many ways reminds of GM in January, another hedge-fund hotel “this time it is different’ cyclical name. When the stock was near its highs and the company gave anemic guidance, the fall was swift.
Investors love to extrapolate the recent past forever and often miss the subtle underlying shifts in the fundamentals. This is especially so for technology companies when “rapido dinero” generalists are long the stock.
With Micron telling us clearly that the Hynix supply situation is back too normal, demand and ASPs are down-ticking next quarter for both flash and DRAM, and the big demand drivers of Windows XP support end upgrade cycle and Bitcoin mining bubble waning, maybe this time isn’t different and commodity cyclical companies are commodity cyclical companies? The cyclical peak is now behind us.