What happened

Shares of chipmaking companies Micron Technology (MU -0.96%), Applied Materials (AMAT -0.57%), and Skyworks Solutions (SWKS 1.06%) plunged on Tuesday, down 4.8%, 9.1%, and 5.4%, respectively, as of 2:27 p.m. ET.

It had been a very good month for chip-related stocks, which saw a big rebound off their late June lows. That is, until yesterday, when Nvidia (NVDA -0.46%) gave a dire warning on its recent quarter's sales figures.

Then this morning, Micron followed up with its own pre-report guidance cut. This was perhaps even more concerning, since Micron had already issued very soft guidance on its prior earnings call just one month ago.

Since Micron is only one of three major DRAM memory manufacturers, it has insight into a lot of different chip end-markets. That's why the warning triggered such broad-based declines in semiconductor capital-equipment companies like Applied, and even logic chip designers like Skyworks.

So what

This morning, Micron's chief financial officer, Mark Murphy, participated in the KeyBanc Technology Leadership Forum. In conjunction with the event, Micron issued an 8-K document warning that its current quarter would come in at or below the low end of its previous guidance.

For reference, on June 30, management guided for revenue between $6.8 billion and $7.2 billion, and earnings per share (EPS) between $1.32 and $1.72. So it looks as if for the quarter ending in August, Micron's revenue and earnings will be at or below $6.8 billion and $1.32, respectively, down significantly from the prior quarter's $8.6 billion in revenue and $2.34 in EPS.

Management also noted it will hold more inventory on its balance sheet to wait out the inventory corrections that it sees at its customers. Therefore, its free cash flow will turn negative in the current quarter.

One ominous tidbit from the presentation was that Micron said it was beginning to see some inventory adjustments even from the pockets of the market that were previously strong. It has been well known that after the pandemic-fueled boom in PCs and smartphones, those end-markets would see declines this year.

But Murphy noted the company is now seeing a broadening of weaker demand, even for customers in the industrial, automotive, and cloud sectors. Murphy noted that end-demand for the cloud is still strong, but the macroeconomic environment has caused some customers to become cautious about their inventory levels.

This was somewhat surprising because in its own recent earnings release on Aug. 4, Skyworks guided for double-digit sequential revenue growth, noting that strength in auto, industrial, and data center markets was "generating solid momentum going into the second half of calendar 2022." Therefore, Micron's announcement today was a bit of a surprise in that it contradicted Skyworks' bullishness from just five days ago. 

In response, Micron noted that it would decrease its overall capital expenditures in fiscal 2023, which starts in September. These cuts will be "adding to the WFE [wafer front end] capex reductions discussed in our June 30 earnings call, and we now expect FY23 total capex to be down meaningfully versus FY22," per the disclosure.

That statement is why Applied Materials, the largest wafer front end equipment supplier by revenue, was down even more than Micron was today. It now appears as if Applied's equipment sales to the memory sector will decline next year.

Now what

Should semiconductor investors sell these stocks on the bad news? It largely depends on the magnitude of the softening in the global economy over the next year, which is notoriously hard or even impossible to predict.

If the global economy falls into a bad recession, these stocks could go lower. However, Micron and Applied are already down 40% off their all-time highs, and Skyworks is down an even greater 50%. Micron has a price-to-earnings (P/E) ratio of 6, and Applied and Skyworks trade at a low-teens P/E multiple.

With all three having bargain-basement valuations, they are probably closer to a bottom than a top. As long as the semiconductor industry remains on a long-term growth path higher than GDP (as it's projected to do over the long term), linvestors who are in it for the long haul should probably view this cyclical downturn as an opportunity to pick up shares on the cheap. Just be prepared for volatility, in both directions.