AI has taken the world by storm, so surely Micron Technology (MU 2.92%) should be booming, right? Not exactly. One of the leaders in memory chips reported another (expected) ugly earnings report, showing $3.8 billion in sales (down 57% from a year ago) during the third quarter of Micron's 2023 fiscal year (the three months ended on June 1, 2023). Adjusted earnings per share (EPS) were negative $1.43 as the company continues to struggle with an oversupply of memory chips and weak pricing on products, though it was a big improvement from the negative $1.91 EPS reported in the prior quarter.
This has been the worst slump for the memory chip market in decades, and there's a long road ahead toward recovery that's being complicated by geopolitical issues with China. Nevertheless, Micron has indicated the next bull market could already be well on its way.
If "chips are the new oil," Micron is signaling recovery
It's often said that "chips are the new oil." It's an oversimplified comparison between a highly engineered device (a semiconductor, including memory chips) and a basic commodity used to generate energy (fossil fuels). But the basic meaning implies that the world -- increasingly becoming digital -- relies heavily on the semiconductor industry these days.
If that's so, memory chips are a proxy for economic health. Memory chips are indeed a basic commodity, used in the manufacture of more advanced chip systems and computers, as well as in the making of all sorts of other products from household appliances to cars. If memory chip sales are beginning to show signs of strength, perhaps the global economy's oft-cited weakness in 2022 and 2023 is about to improve. Indeed, over the last decade, Micron's sales have been highly sensitive to even small changes in economic growth. When GDP (gross domestic product, a measure of economic growth) slows, Micron falls. When GDP heats up, memory chip sales do too.
Data by YCharts.
The message Micron might be sending now is that the global economy might be about to firm up next year. Revenue in the last quarter was up a mere 2% from the previous one, and remains off sharply from the last peak in 2021 and early 2022. But more incremental progress is coming. For the next quarter, management expects revenue to increase to $3.9 billion, implying a quarter-over-quarter increase of nearly 3%.
And for those Micron shareholders out there, more progress is also expected in narrowing those EPS losses too.
The other wild card to consider: China
Micron actually might have reported a far better rebound than it did for the next quarter, thanks to big increases in orders from AI systems partners like Nvidia, if not for an unfortunate series of recent events. As reported on May 24, 2023, the Cyberspace Administration of China (CAC) decided Micron's memory products failed to meet cybersecurity standards. Management has said that half of its sales to mainland China are at risk. Given about one-quarter of Micron's revenue is from this geography, it seems to imply about 12.5% of sales were just wiped out next quarter and beyond. That makes the anticipated 3% quarter-over-quarter growth rate more impressive.
Some pundits think China is retaliating for the U.S.'s own curbs on AI chip exports to China. Whatever the reason, though, Micron's revenue outlook would have been pretty darn good if not for the geopolitical intrigue. Someone else (China's own domestic memory chipmakers, or maybe South Korean memory giants Samsung and SK Hynix) will be filling that rising demand. Micron management is working on mitigating the "fluid" situation.
Is the next bull market here?
Setting aside Micron's messy outlook due to China, it appears the memory market is in the early stages of finding its footing again. Through fiscal 2024, demand for memory chips is expected to ramp up, from AI but also other areas like the automotive and PC markets too. Along the way, product selling prices are anticipated to bounce off of depressed levels and begin recovering. If Micron's predictions prove true, the global economy will be just fine this year and in 2024.
Of course, that may not make Micron stock a buy. It's actually been a pretty decent stock over the last couple decades since the dot-com bubble popped, but this is nonetheless a gut-wrenching place to have money invested, as the present downturn has illustrated. Investors could also check out Pure Storage (PSTG 1.40%), which has devised a subscription-based business model for digital memory.
Data by YCharts.
At any rate, Micron's last earnings report was full of takeaways, most prominent among them that things may actually be looking up again for the beleaguered market weighed down by the threat of inflation and recession for well over a year now. Expect more turbulence ahead, but uncomfortable bumps are the norm for Micron's stock, even in bull markets.
