The semiconductor market's ongoing downturn has been as stubborn as a computer virus, but Micron Technology (MU +4.80%) is plugging away at inventory management in hopes of sparking a brighter future.
The company's hot-off-the-presses report for the second quarter of fiscal year 2023 showed declining revenues and margins. At the same time, it highlighted the company's efforts to manage inventory and long-term growth prospects driven by the rising demand for artificial intelligence (AI) technologies. In particular, management mentioned OpenAI's ChatGPT and similar large language models (LLMs), which rely on massive amounts of digital memory.
NASDAQ: MU
Key Data Points
Micron's meager financials
Things were far from chipper for Micron in the just-reported quarter, as the company faced a challenging market environment. Many consumer-driven end markets are at a standstill due to tightened budget belts, and economic activity is curbed even more due to a global web of shortages in manufacturing and shipping services.
So Micron's financial results didn't impress anybody. Total revenue was down 53% year over year, with a negative 31% gross margin and a negative 56% net margin. That's right -- Micron collected less top-line revenues than it spent to manufacture its memory chips. That's a rough quarter.
Even so, the company generated $343 million of positive cash from operations. Also, Micron's balance sheet held a robust $12.1 billion in cash and short-term investments, roughly equal to the total long-term debt balance.
Clearing out excess inventory
This report emphasized Micron's focus on trimming excess inventory across global distribution and customer networks. Lopsided supply-and-demand situations across the computing and consumer electronics industries in the last three years have saturated warehouses with excess memory-chip inventories, and Micron's own product reserves ballooned as well.
This is what Micron's inventory trend looked like heading into this week's results:
MU Inventories (Quarterly) data by YCharts.
I've seen cyclical swings before, especially in the volatile memory-chip sector, but the ongoing revenue spike is kind of ridiculous.
On the upside, Micron reduced its chip inventories to $8.1 billion this time, so the peak should fade in the rearview mirror from now on. And to get there, the semiconductor giant is taking resolute action.
Micron reduced its fiscal 2023 capital expense budget by more than 40% and cut chip wafer starts by about 25%. With these strategic moves, Micron hopes to reboot its growth-driving actions and financial gains in calendar year 2024 and beyond.
Record-large memory market in 2025
Micron's CEO, Sanjay Mehrotra, expects the memory-chip industry's total addressable market (TAM) to reach a new record in 2025, driven by the rise of LLM-style AI technologies such as ChatGPT and Alphabet's (GOOG +0.34%) (GOOGL +0.23%) Google Bard.
AI technologies require enormous amounts of memory and storage to operate effectively. That's true for training a new LLM system, updating its technology platform, and running the day-to-day operations of generative AI processes. Each step of the way, the LLM relies on very large banks of DRAM (dynamic random access memory) chips -- the more, the better.
As more industries adopt similar AI solutions and deploy their large-scale models, the demand for memory products like those provided by Micron is expected to surge. In other words, AI should fuel a RAM-page of growth for Micron and other memory-focused companies.
ChatGPT and Google Bard are just the first tips of the AI iceberg, of course. These LLMs have already demonstrated their transformative capabilities, providing a glimpse into the potential of future AI applications. Many copycats and wannabe rivals will surely emerge, and some may evolve into legit ChatGPT rivals over time. As these AI technologies evolve and become more widespread, they will fuel demand-side growth for memory and storage solutions for years.
With the demand for AI solutions rising, Micron is positioning itself to cater to this booming market and satisfy its craving for memory products.
NASDAQ: GOOGL
Key Data Points
Micron's AI-powered return to growth
So, despite the near-term challenges posed by the semiconductor industry's downturn, Micron's leaders have not lost their enthusiasm for the company's prospects. They anticipate a gradual improvement in supply-demand balance, followed by a return to normalized growth and profitability in line with their long-term financial model. As AI technologies and LLMs reshape the landscape, Micron aims to ride the wave of growth and emerge stronger than ever.
For us ordinary investors, Micron's report was a financial dud with an AI-based silver lining in the long-term view. As the company focuses on inventory management in 2023, it should be ready to benefit from an upsurge in memory and storage products as AI systems and LLMs grow more popular.
Micron is navigating rough waters, but its sights are set on the AI-driven long-term horizon. While the short-term challenges are evident, the potential for sustained growth driven by the rising demand for ChatGPT, Google Bard, and their successors is undeniable.
As Micron doubles down on inventory management to take advantage of the burgeoning AI market later on, investors would be wise to monitor the company's progress. If you like what you see, you should be ready to buy Micron stock on the near-inevitable dips along the way.
