Is Micron Stock a Buy Now?

Micron Technology (MU 3.64%) posted a disappointing earnings report on Dec. 21. In the first quarter of fiscal 2023, which ended on Dec. 1, the memory chipmaker's revenue plunged 47% year over year to $4.09 billion and missed analysts' estimates by $50 million. Its adjusted net loss of $39 million, which fell from a net profit of $1.62 billion a year ago, trickled down to a net loss of $0.04 per share, and also missed the consensus forecast by two cents.

Micron had already warned investors of a grueling cyclical downturn during its fourth-quarter report in late September, but it still failed to clear Wall Street's low bar. This also represented Micron's second consecutive quarter of declining revenue -- which ended a nine-quarter streak of rising revenues from fiscal 2020 to fiscal 2022 -- and it expects that downturn to continue with a 49%-54% year-over-year decline in revenue in the second quarter.

Image source: Getty Images.

Micron's stock dipped slightly following that report, and it remains nearly 50% below its all-time high of $96.83 per share in January. Should investors buy shares of Micron as its cyclical downturn drives away the bulls?

How bad was Micron's slowdown?

Micron is one of the world's leading manufacturers of DRAM and NAND (flash memory) chips. During the first quarter, it generated 69% of its revenue from DRAM chips and another 27% of its revenue from NAND chips. The remaining 4% came from other types of memory chips.

Micron's last growth cycle kicked off in the second half of fiscal 2020, driven by the arrival of new 5G devices, an acceleration in PC sales as more people worked from home during the pandemic, and data center upgrades to deal with the rising usage of cloud-based services. But as the following table illustrates, the memory market stalled out over the past year.

Data source: Micron. YOY = Year over year. *Non-GAAP.

Micron's growth sputtered out as the lockdown measures ended, sales of PCs and 5G devices cooled off, and the macroeconomic headwinds throttled enterprise spending on big cloud upgrades. The unpredictable COVID-19 lockdowns in China also exacerbated that pressure. It expects its non-GAAP (generally accepted accounting principles) gross margin to slip to 2.5%-8.5% in the second quarter as that slowdown intensifies.

How long will this downturn last?

During the conference call, Micron CEO Sanjay Mehrotra said the memory chip market was "experiencing the most severe imbalance between supply and demand in both DRAM and NAND in the last 13 years." However, Mehrotra expects most of Micron's customers to reduce their inventories to "relatively healthy levels by mid-calendar 2023," and that its second-half revenue will "improve versus the first half of our fiscal year" as the market's supply-demand balance is gradually restored.

But even if the market stabilizes in terms of revenue and bit growth, Mehrotra expects its "profitability to remain challenged through calendar 2023" as the cyclical downturn continues. To counter that pressure in fiscal 2023, Micron will lay off about 10% of its workforce, reduce its capex by roughly 40% year over year, and rein in its other operating expenses.

Micron didn't provide any precise guidance for fiscal 2023, but analysts expect its revenue to decline 42% this year with a net loss. For fiscal 2024, which will start in September 2023, they expect its revenue to rise 40% with a full-year profit. We should take those estimates with a grain of salt since a recession could easily prolong the pain, but Micron has withstood plenty of cyclical downturns throughout its 44-year history. Micron still manufactures denser and more power-efficient chips than its larger South Korean rivals Samsung and SK Hynix, so investors don't have to worry too much about direct competition.

If you believe Micron can ride out the near-term headwinds, it might look like a compelling buy right now at just 3 times this year's sales. But it's also easy to find even cheaper chipmakers in this bear market: Intel (INTC 1.23%), which is in the process of selling its NAND business to SK Hynix, trades at less than 2 times this year's sales, while Western Digital (WDC 2.01%), which competes against Micron in the NAND market, trades at less than 1 times this year's sales.

Is it the right time to buy Micron?

Micron is a well-run chipmaker that will profit from the long-term expansion of the DRAM and NAND markets. But its stock won't rally anytime soon, and it could decline even further in this difficult market for slower-growth tech companies. So for now I'd avoid Micron and stick with more balanced and well-diversified chipmakers until more green shoots appear.