Since June, Micron stock has been soaring. However, the stock is now taking a hit after Micron Technology Inc (NASDAQ:MU) released its Q4 earnings report. The guidance, in particular, indicates that the down cycle is far from over.

Disappointing Guidance

Its Q4 results beat Wall Street estimates, but the earnings guidance was disappointing. The company reported an increase in shipments of both NAND and DRAM chips in the quarter, although average selling prices appeared to continue plunging.

The company beat analysts’ earnings estimates of $0.48 per share on revenue of $4.52 billion to report earnings of $0.56 per share on sales revenue of $4.87 billion. However, the earnings dropped almost 50% from Q3 last year and over 84% from Q4 last year. This is the third consecutive quarter the company is reporting a decline in sales and earnings as it continues to contend with the current memory-chip down cycle.

The company registered a gross margin of 30.6% in Q4, which is a drop from the sequential quarter’s 39.3%. The company expects gross margin in Q1 2020 to drop further to around 26.5%. In the current quarter, the company expects earnings of $0.46 per share on revenue of $5 billion.

Following the release of the report, Micron stock slid 9% at $44.26 in Friday’s trading session.

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Changing Depreciation

Currently, Micron Technology depreciates its NAND and DRAM equipment over five years and seven years, respectively. The depreciation expense is inclusive of the cost of products sold. But from Q1 2020 the company will change the depreciation period of NAND equipment to seven years. This will significantly cut Micron’s depreciation expense by $80 million in Q1 and by around $100 million to $150 million each quarter for the whole of FY2020. Reducing depreciation expense will help in boosting the company’s gross margin.

Despite the change from the guidance, it is clear that weak pricing is still huge per-bit expense reductions. The company’s inventory is huge and rose over $200 million the past quarter. The company is experiencing demand recovery, although it is yet to lead to a price recovery. Despite the current downturn, the company still remains profitable.

Despite today’s weakness, Micron stock is still up about 40% so far in 2019.

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