Memory chip manufacturer Micron Technology (MU -0.60%) recently put the final wrap on its 2021 fiscal year (the 12 months ended Sept. 2, 2021), reporting a big rebound in revenue from 2020. However, many investors have remained skeptical about Micron's claims that its business -- historically one that behaves like the ebbing and flowing tides -- is riding a new long-term growth trend driven by artificial intelligence and 5G mobile networks. After skyrocketing to all-time highs this past spring, Micron has been an underperforming chip stock and is now down about 3% so far in 2021.
The most recent worry surrounds management's outlook that it will kick off its new fiscal year with a quarter-over-quarter sales decline. It could be an early indication the tide is ready to go out for Micron's business, or it might be a temporary pause tied to effects from a global chip shortage. Is this the best place to invest your money in the semiconductor industry right now?
The weirdest memory chip cycle "boom" ever
Micron had only just begun to recover last year from a cyclical downturn in chip sales that was accentuated and worsened by the U.S.-China trade war. Then COVID-19 struck. In spite of another halt in sales, though, the pandemic set off a massive upgrade cycle in consumer electronics. Stuck at home, many households went shopping for devices -- both for personal and business use. As memory chips are a basic commodity in virtually every piece of electronic hardware out there, the surge in demand helped lift Micron out of the doldrums.
But here's the current rub: After a rally in fiscal 2021 (revenue rebounded 29% from 2020 to $27.7 billion), management forecast a sequential decline in sales. Q4 2021 revenue was $8.27 billion, but Q1 fiscal 2022 is expected to be just $7.65 billion at the midpoint.
Since Micron is a cyclical chip fab (that is to say, manufacturing) outfit, these quarter-to-quarter dips can be an early signal a more sustained downturn is brewing -- even though the revenue outlook for Q1 still implies a 33% year-over-year increase ($7.65 billion versus $5.77 billion in Q1 2020). But given the deep disruption to global supply chains right now brought on by the pandemic, there's plenty of worry Micron could be headed down from here and cut this current memory cycle boom short. Other components in the tech world are in tight supply, and without them, higher-order manufacturers (like laptop and smartphone makers) don't have an immediate need to purchase more memory.
As a result, Micron hasn't been able to fully take advantage of the chip shortage that's been roiling the economy as of late. If memory chip inventories rise at these manufacturing partners and cause a fall in chip price, look out below.
Focus on the long-term winners
There's another way to look at the problem, though. According to CEO Sanjay Mehrotra, the chip shortage is extending demand (or making sales "stronger for longer," in Mehrotra's words on the earnings call) since many end-user device orders are going unfulfilled. Plus, even as consumer demand wanes, enterprise demand is just starting to pick up steam again. New cloud-based services like AI have set off a new upgrade cycle for the data centers that power the software, and 5G network buildout is continuing apace.
Pair those new secular growth end markets with the fact that the memory chip industry has consolidated to just a few players over the last decade, and Micron is in arguably better shape than it ever has been. If a new downturn is brewing, there's a better chance that profit margins will be far more durable than in the past as a supply glut can be more easily managed with fewer industry producers -- not to mention the higher margins that come with more advanced chips powering the cloud and 5G.
To reinforce that point, Micron's gross profit margin on products sold in Q1 is expected to be almost in line with where it just was in Q4, in spite of the expected dip in total sequential output: about 46%, plus or minus 1%. In all, the company's top brass expects the bottom line to fare pretty well in the next year and support the expected $11 billion to $12 billion in capital expenditures (purchase of property and equipment) in 2022 compared to the just under $10 billion spent in 2021. There should be plenty of room to pay for the recently initiated dividend (currently yielding 0.6%) and the $6 billion left over on the current share repurchase plan (over 7% of Micron's current market cap).
At 16 times trailing-12-month earnings per share (or 14 times on an adjusted earnings per share basis), Micron could be a great value in the semiconductor space right now -- but only if you believe trends like cloud, AI, and 5G will last at least through the next few years and gradually increase demand for memory circuitry. I don't think Micron is the best ultra-long bet on those secular trends, but with many chip stocks flying high this year, Micron might be a "cheap" alternative to add into the mix.