What happened
Shares of Micron Technology (MU -0.93%) fell 12.3% in March, according to data from S&P Global Market Intelligence.
It was curious that Micron fell during the month, considering it reported very strong quarterly results. And unlike other tech stocks, many of which have given cautious guidance for 2022, Micron actually guided well above expectations for the current quarter.
Likely, it was macroeconomic fears that hurt Micron, since its financial results gave no reason to sell the stock.
So what
In its fiscal second quarter, Micron delivered $7.79 billion in revenue and non-GAAP (adjusted) earnings per share (EPS) of $2.14 -- both well ahead of expectations. Not only that, but the company gave much better-than-expected guidance for the current quarter, with revenue rising to $8.7 billion next quarter and EPS rising to $2.46, plus or minus $0.10, compared with analyst expectations of $2.22.
Micron actually rose immediately after reporting, but the stock had had a difficult month leading up to earnings, and shares fell back below its pre-earnings price a couple of days later.
So what gives? It's hard to say, but recession fears are likely to blame, as the yield curve narrowed and then inverted last week. An inverted yield curve is when the two-year Treasury Bond yield moves above the 10-year Treasury Bond yield. In the past, an inversion has typically preceded a recession. However, that's not a certainty. Some think because the Federal Reserve's balance sheet is so large, it can control the longer end of the curve. Others believe the three-month–10-year spread is more indicative of the state of the economy, and that curve isn't close to inverting.
Regardless, the 2-10 inversion likely caused pressure on Micron's stock. Micron makes memory chips, which are regarded as a cyclical commodity, meaning their prices fluctuate with supply and demand. Micron also produces its chips in-house, meaning it has to invest in lots of property, plant, and equipment, making it a capital-intensive business.
Since Micron's products are "price-takers," many investors fear a coming pullback in demand for chips, which would cause the price of memory to fall, and Micron's currently strong profits along with it.
Image source: Getty Images.
Now what
Micron's results will fluctuate with the economy, but I happen to think future cycles will be less severe than those of the past. Why? First, because in the most recent down cycle during 2019 and 2020, Micron was still profitable, earning $2.7 billion. That was the first time Micron went through a memory downturn without dipping into the red.
The memory industry has consolidated over the decades to just a handful of big, powerful players, which have gotten better at controlling supply. That controlled supply has combined with a broadening of memory demand to create a more favorable market. Micron not only rises and falls with consumer demand for PCs and phones -- although those are still important markets. Rather, digital transformation and artificial intelligence applications require huge amounts of memory and storage. In fact, the data center market surpassed the mobile phone market as the largest memory market just last year.
And besides the huge and growing data center market, the auto segment represents another rising star for Micron and other memory players. Autos represented just 10% of Micron's revenue last quarter, but is among the fastest growing sectors. That's because autonomous and electric vehicles require vastly more memory and storage content -- as much as 15 times that of the average car today. So with Micron not only selling into consumer devices, but also into the long-term secular trends of big data and automation, demand should generally be on a steadier growth path going forward.
Lastly, in a signal to investors that the industry may be steadier than in the past, management instituted a dividend last year. While small, the commencement of a quarterly payout to shareholders is a sign management believes Micron will be a more steadily profitable company going forward.
Of course, amid today's cyclical fears, investors aren't giving Micron much credit until it proves itself during another downturn. That's why the stock isn't getting any respect for its outstanding operating performance and execution of late -- at least, not yet.
