A perfect storm has hit memory chip maker Micron (MU 4.58%). Following a period of soaring demand and strong pricing during the pandemic, the bottom is now falling out of the memory chip markets.

Micron's revenue tumbled 47% year over year in its fiscal first quarter, which ended Dec. 1. Bit shipments plunged by double-digit percentages from the previous quarter across Micron's product lineup, and average selling prices were down more than 20%. There's too much supply and not enough demand, a recipe for disaster in a cyclical, commodity industry.

"The industry is experiencing the most severe imbalance between supply and demand in both DRAM and NAND in the last 13 years," said Micron CEO Sanjay Mehrotra during the earnings call.

Weakness everywhere

The state of the PC market was a known quantity going into Micron's earnings report. Global PC shipments tumbled 19.5% year over year in the third calendar quarter, according to Gartner, so Micron's forecast calling for PC units to slump by a low- to mid-single-digit percentage in calendar 2023 wasn't a surprise.

What was a surprise was the rest of Micron's forecast. Micron now sees demand from cloud computing customers to grow "well below historical trend" in 2023 due to the impact of inventory corrections at some customers. In other words, some of Micron's cloud customers bought too much memory, and now they're working it down.

Micron also expects the mobile market to be challenging. The company sees smartphone unit volume being essentially flat in calendar 2023 following a 10% decline in calendar 2022. The industrial market is also set to soften, although Micron does see some strength coming from automotive customers.

More concerning than short-term trends was Micron's reduction to its long-term estimates. Micron lowered its long-term bit demand growth estimates for both DRAM and NAND from where they stood earlier this year. Weak PC and smartphone markets drove some of that decline, as did a cooling of the company's view on the long-term growth potential of the cloud market.

Pulling out all the stops

Micron is aggressively cutting its costs and capital spending to help cope with this downturn. Total capex in fiscal 2023 is expected to be $7.5 billion at most, and the company expects wafer fab equipment capex to be down around 50% year over year. The plan for fiscal 2024 has also been gutted, with the company expecting to drop its wafer fab equipment spending below fiscal 2023 levels.

Micron has also reduced wafer starts for both DRAM and NAND by around 20%, and it's working to cut operating expenses. Micron expects to exit the current fiscal year with quarterly operating expenses sitting around $850 million, down from roughly $1 billion currently. A 10% reduction in headcount over the next year will help the company hit this target.

While this cost-cutting is necessary, it's not nearly enough to offset plunging demand and prices for memory chips. Micron expects to produce just $3.8 billion in revenue in the fiscal second quarter, down 51% year over year, with an adjusted gross margin of 8.5% and an adjusted net loss of $0.62 per share. In the prior-year period, Micron generated an adjusted gross margin of 47.8% and adjusted earnings per share (EPS) of $2.14. These estimates have wide error bars reflecting the unpredictability of the memory chip markets.

Micron's guidance is actually even worse than it looks. An insurance recovery settlement related to an operational disruption in 2017 occurred in the fiscal second quarter, and Micron expects to recognize most of a $120 million payment as revenue. Backing that out, revenue would be just $3.68 billion and gross margin would be closer to 5.5%.

Micron's gross margin hasn't been this bad since the 2008 financial crisis. Before that, you'd have to go back to the aftermath of the dot-com bubble bursting. Long story short, this is going to be the biggest test Micron has faced in a very long time.

Demand for memory chips will eventually bottom out and start to recover, and pricing will eventually stabilize. But that process may take quite a while. Expect big losses and a volatile stock price as Micron battles its way though the worst environment in over a decade.