The second-quarter earnings season is starting in earnest. The biggest question among market-watchers is gauging the impact of the coronavirus. Currently, analysts are expecting companies to take a slight hit with profits and sales rebounding to pre-coronavirus levels by the end of the year.
One reason stocks have been so strong is that first-quarter earnings were quite impressive relative to expectations. There's a remarkable divergence between the news, where economies in certain places are having to shut down again due to increasing case counts, and the stock market, where stocks are relentlessly climbing higher.
Earnings season will tell us who has it right. Thus, Micron's
Inside the Numbers
Micron's shares jumped 5% higher following its results. The catalyst for this move was the increase in guidance for its next quarter. Most analysts were expecting a slight increase. The company expects it'll earn $0.95 per share on revenue between $5.75 and $6.25 billion in its fiscal fourth quarter. This is an increase from 2019's fiscal fourth-quarter of $0.56 per share on $4.87 billion in revenue. Most analysts were expecting $0.79 per share on $5.46 billion in revenue.
In the current quarter, Micron reported $5.6 billion above its forecast of $5.4 billion which is a 14% increase from the previous year. Most noteworthy is that Micron sold more units and had a higher average selling price than what was forecast by the company and analysts. Micron produces DRAM and NAND memory chips which are used in PCs, servers, digital cameras, and USB drives. There have been concerns that the market was oversupplied which would lead to falling prices. Of course, this could be exacerbated by the coronavirus leading to a drop in demand.
Thinking It Through
So far, this is not happening, and Micron is projecting that prices will rise in the fourth quarter. The ultimate reason is that end-demand among consumers and businesses for PCs and servers has remained strong. It could indicate that the economy is stronger and more resilient than commonly believed, or it could be that tech spending is now a necessity and not discretionary. And of course, another possibility is that both are true.
One conclusion from the strength in tech stocks and their earnings power is that spending on technology for companies is a necessity. Recent events have shown that companies in many industries can run just as fine virtually without offices due to the right combination of software and hardware.
Many investors in SaaS (software as a service) stocks brag that companies will pay their software and cloud bills before they pay their debt because of its importance to their daily operations. Many such programs lead to gains in efficiency, cost-savings, and increases in revenue. Of course, the engines of these programs are computer chips like those made by Micron. In previous cycles, tech spending fluctuated with the economy. This report is either telling us that the economy is strong or that relationship has changed.
