Shares of digital memory chipmaker Micron Technology (MU -1.58%) are going to end 2022 on a sour note, and for good reason. The company is in the midst of a severe downturn as demand for memory chips falters. The reason? After a more-than-two-year spending spree spurred by work-from-home early in the pandemic, consumers aren't spending much on electronic devices these days. As a result, shares of the chipmaker have tanked 45% this year with just a few days to go until 2023.
Memory chips are a basic commodity used in all sorts of higher-order computing systems, which makes Micron's brand of manufacturing one of the most volatile businesses in the chip industry. Downturns like this current one are normal (though not usually quite this severe). Just like in times past, Micron will likely recover. But can that recovery happen in 2023?
Setting the stage for this disaster
Micron put in the hard work ahead of the pandemic to get itself better situated for the boom-bust cycle it is prone to. Under CEO Sanjay Mehrotra, Micron walked away from low profit-margin deals and focused instead on its more advanced memory manufacturing processes. As a result, revenue just barely peaked at record highs in 2021, and profits never quite reached the past-cycle highs. However, Micron's balance sheet was on solid footing headed into this crisis, and the company even began paying a dividend and repurchasing stock (more on that in a moment).
Data by YCharts.
However, this current downturn is one of the worst on record for memory chips. The consumer slowdown for things like PCs and smartphones is occurring right at the same time as global supply chains begin to loosen from early pandemic log jams. Things are getting ugly. Revenue in Q1 fiscal 2023 (the three months ended Dec. 1, 2022) fell 47% year over year to $4.09 billion, closer to the low end of guidance management had provided a few months prior. Net loss was $195 million (or an $0.18 per-share loss), compared to net income of $2.3 billion (earnings of $2.04 per share) in the same period a year ago.
A light at the end of this dark tunnel
It might be easy to turn up the heat on Mehrotra and the top team, but let me emphasize the good work that's been done ahead of this down cycle.
Despite mounting losses, Micron's balance sheet is in shape. Cash and short-term investments totaled $10.6 billion at the beginning of December, with an additional $1.4 billion in long-term investments, offset by debt of $10.3 billion. To keep its balance sheet shored up, cost cuts are being made -- which means a slower pace of investments in next-gen memory tech and, more concerning, job losses. Let's hope for a business rebound and rehires as soon as possible.
Nevertheless, Micron should be able to weather this downturn. At the midpoint of guidance, Q2 fiscal 2023 revenue is expected to dip again to $3.8 billion, and net loss per share will drop to about $0.79. However, starting in the second half of the fiscal year, Micron expects sequential growth to return and losses to begin to ease. Based on this outlook, the memory market downturn should bottom around March to June of calendar year 2023. In the meantime, the business has more than enough cash on hand to weather the storm.
When will the stock rebound?
It's difficult to say if and when Micron stock will return to the all-time highs reached in late 2021 and early 2022. However, the drastic cuts to memory chip supply by Micron and its peers are setting the stage for a rapid industry-wide recovery. After all, demand for chips isn't going away, and demand for memory will likely outpace production in 2023. Once existing inventory is used up, Micron sales and profitability will race higher.
The timing of just when that will occur is tough to pinpoint today, but you should expect that run higher to begin sometime in the second half of calendar year 2023. As in times past, the market will likely sniff out a recovery -- and Micron stock will likely begin to rally -- before the company actually starts reporting higher sales and profits. And in the meantime, Micron's strong balance sheet has allowed it to continue paying a dividend (which currently yields 0.9% a year) and repurchasing stock ($425 million-worth last quarter, or 0.8% of the current market cap).
Micron stock is not for the faint of heart. This downturn could, of course, get worse than the company currently forecasts, and shares could decline further than they have already. But if you're looking for a time to buy, down cycles have historically been the right time to do so for Micron. If you're bullish on computing technology and semiconductors, right now could actually be one of the best times to go shopping for this stock if you plan on holding for at least a few years.
