Micron MU is set to report quarterly earnings after the bell Tuesday. Analysts expect revenue of $3.46 billion and EPS of $0.23. The revenue estimate is down 4% sequentially, which follows a 7% sequential decline last quarter. Micron’s story is a mixed bag, but here are the two items investors should focus on this quarter:

Declining Margins

Micron has a complicated story. PC sales are in decline and so are the memory chips that go inside them. Meanwhile, Samsung (OTC:SSNLF) and its semiconductor ambitions have weighed on DRAM prices. The combination of declining prices and volume has hurt Micron’s gross margins.

In FQ4, revenue was off 7% sequentially while gross margin in dollar terms was down 19%. This trend has led to a loss of about 55% in MU over the past year versus a flat return for the S&P 500 (NYSEARCA:SPY). MU has historically been a popular stock among hedge funds, but with this type of performance, the adulation is unwarranted.

Gross margins have fallen from their peak of 41% in FQ1 2015 to 24% last quarter. Part of the fall off could be due to hiccups from Micron’s shift from PC DRAM to mobile DRAM. Once its new strategy is finally put into place, margins should improve. However, with slowing smartphone sales in China (the largest market for mobile phones), growth from the mobile market could take longer than management once thought.

Iotera Acquisition

When Micron lost the SanDisk SNDK sweepstakes, the company missed out on an important lifeline. The deal could have added scale in NAND and potentially improved margins. Micron could potentially make up for it with the acquisition of the remaining 67% stake in a Taiwanese memory chipmaker, Inotera. The deal is expected to be accretive immediately. Most importantly, it increases Micron’s DRAM output by about 35% and adds scale. Hopefully, it will also improve DRAM margins.

In some respects, Micron channels Intel INTC. Intel’s acquisition of Altera ALTR got the market off of Intel’s money-losing mobile strategy and onto the integration of and the added revenue from Altera. The Inotera transaction will too get investors’ focus off of questions concerning Micron’s mobile expansion. It amplifies MU’s earnings sensitivity to DRAM prices; however, in my opinion, due to added scale and potential margin improvement, Micron’s acquisition trumps Intel’s.

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