What happened
Korean tech giant and computer memory-chip maker Samsung announced shockingly bad earnings on Friday, with profits down 96% and a plan to cut memory production "by a meaningful level."
This was bad news for Samsung, but it's giving a noticeable lift to shares of embattled rival Micron Technology (MU 3.17%), which is up 7.5% on the news today, as of 10:15 a.m. ET.
NASDAQ: MU
Key Data Points
So what
As you may recall, late last month, Micron reported a 53% decline in revenue as memory prices dropped due to oversupply in fiscal Q2 2023. Management further warned that fiscal Q3 revenue will be down 57% year over year, with negative gross profit margins causing a probable $1.58-per-share adjusted loss for the quarter.
Too few buyers buying too many chips in a glutted market is one of Micron's biggest problems right now. That's why Samsung's bad news is sounding like good news to Micron shareholders. As Deutsche Bank pointed out in a report this morning, "high levels of inventory" are being complicated by "rapidly deteriorating end [market] demand" to cause price erosion, making it hard for anyone in the memory market to turn a profit right now. Samsung's decision to cut production will attack at least one of these two problems, reducing pressure on prices that should benefit everyone in the industry, reports TheFly.com.
Now what
Investors looking at a potential investment in Micron today should pay special attention to the fine print here. According to Deutsche Bank, Samsung intends to reduce production of DRAM memory while leaving NAND flash production levels mostly intact. According to data from businessquant.com, this is especially good news for Micron, which gets 63% of its money from DRAM sales and only 31% from NAND, such that it should benefit disproportionately from Samsung's cuts.
That being said, it's still not obvious that this development is good enough news to make Micron stock a buy just yet. Micron comes with a recent valuation of 40 times trailing earnings, a huge expected loss this year -- more than $5 per share, according to data from S&P Global Market Intelligence -- and an expected return to profits in 2024 yielding a sky-high forward P/E ratio of 87. So it could be 2025 before Micron is earning enough money to make its stock look cheap again.
Whether you should buy Micron on today's news depends a lot on whether you have the patience to wait that long.
