Micron (MU 37.00, +4.32, +13.2%) is up sharply after beating Q3 expectations. The chipmaker's results can be categorized as better than feared, considering Micron's EPS decreased 66.7% yr/yr to $1.05 while revenue fell 38.6% yr/yr to $4.79 bln.
The report gave a strong boost to the stock, but it should be noted that today's rally comes after Micron spent the past month just above a five-month low.
The market was encouraged by the company's ability to exceed lowered expectations while guidance from Micron's management suggested that a bottom may be forming in the semiconductor market.
Expectations for an improvement in the near term allowed investors to look past a significant decrease in gross margin, which fell to 39.3% in Q3 from 60.9% one year ago. The company expects that gross margin will be between 27.5% and 30.5% in Q4.
Micron's management maintained an optimistic tone when discussing demand trends. CEO Sanjay Mehrotra said the company has "confidence that bit demand for DRAM will return to healthy year-over-year growth in the second half of calendar 2019." Mr. Mehrotra added, "NAND bit demand is also increasing in most markets as elasticity kicks in, in response to price declines over the last year."
However, the optimism was hedged with some caution. Micron issued guidance for Q4 EPS between $0.38 and $0.52, which is well below market expectations. In addition, the company acknowledged that it will need to reduce its capital spending by more than previously expected in order to allow a rebalancing of the end market.
With the market focusing on positive-sounding comments, investors are looking past another increase in inventories, which climbed to $4.91 bln in Q3 from $4.39 bln during the previous quarter and $3.37 bln one year ago.
The continued inventory growth suggests the company is having a difficult time passing inventory onto retailers. This serves as a reminder about a tough pricing environment and it puts Micron at a risk of having to write-off some of its inventory if end demand doesn't recover as swiftly as the market hopes.
Micron trades at its best level in almost six weeks today, as the market expresses hope that the company is on the road to recovery after seeing a sharp drop in demand in late 2018/early 2019.