The rally in semiconductor stocks this year helped shares of Micron Technology (MU 2.92%) rise impressively in the first half of 2023 despite the memory market's downturn, but the stock has been pulling back despite reporting better-than-expected results at the end of June.
Micron released its fiscal 2023 third-quarter results (for the three months ended June 1) on June 28. The company delivered $3.75 billion in revenue, which exceeded consensus estimates of $3.65 billion. It also reported a smaller-than-expected loss of $1.43 per share, as compared to analysts' expectations of a loss of $1.61 per share.
The company's revenue guidance of $3.9 billion for the current quarter was also slightly ahead of the $3.88 billion consensus estimate. But Micron's quarterly results didn't receive a positive response from the market, as the stock has lost nearly 5% since June 28. Nevertheless, the stock posted impressive gains of 28% so far this year. However, a closer look at Micron's earnings report reveals significant challenges facing the company.
Micron Technology's results were impacted by multiple headwinds
Though Micron beat estimates last quarter, it witnessed a massive decline in its revenue and earnings as compared to the prior-year period. Revenue was down 57% year over year, while the company swung to an adjusted loss as compared to a non-GAAP (generally accepted accounting principles) profit of $2.59 per share in the year-ago period.
These massive declines in Micron's top and bottom lines can be attributed to the steep declines in sales of personal computers (PCs) and smartphones. According to Gartner, PC shipments were down a whopping 30% year over year in the first quarter of 2023. Smartphone sales were down 15% year over year in the first quarter, according to IDC. The decline in sales of these devices has created an oversupply of memory and storage chips in the market, and that has caused a crash in memory prices.
Given that the PC and smartphone markets are not expected to recover in 2023, Micron's struggles are set to continue in the short run. This is evident from the company's guidance for the current quarter. Though Micron's $3.9 billion revenue forecast for the fourth quarter of fiscal 2023 is slightly ahead of what analysts were looking for, it would be a 41% decline over the year-ago period.
The company posted earnings of $1.45 per share in the fourth quarter of fiscal 2022. It is anticipating an adjusted loss of $1.19 per share in the current quarter.
Another factor that will weigh on Micron is the ban imposed by Chinese regulatory authorities on its chips, citing security concerns.
As the company gets a quarter of its overall revenue from China and Hong Kong, this ban is going to slow down the company's recovery process, per management.
More specifically, "approximately half of that China headquartered customer revenue, which equates to a low double-digit percentage of Micron's worldwide revenue, is at risk of being impacted," Micron CEO Sanjay Mehrotra said during the fiscal Q3 2023 earnings call.
These headwinds explain why Micron's guidance is woeful. However, Micron's revenue is expected to decline at a relatively slower pace in the current quarter when compared to fiscal Q3. Mehrotra believes "that the memory industry has passed its trough in revenue, and we expect margins to improve as industry supply demand balance is gradually restored."
The chipmaker has been reducing its output in the current fiscal year in a bid to bring down the supply-demand imbalance. Micron's fiscal 2023 capital expenditure budget of $7 billion represents a 40% decline over last year. The company reduced its wafer production capacity by 30% this year and expects to further reduce output going into 2024.
A major turnaround is expected in the next fiscal year
We have already seen that memory industry participants are cutting down their production capacities. Additionally, memory demand is expected to improve next year on account of multiple catalysts such as a recovery in the PC and smartphone markets, as well as the growing demand for memory and storage solutions from artificial intelligence (AI).
A potential recovery in demand, coupled with tight supplies, should ideally boost memory prices in 2024. Gartner expects the memory industry's revenue to jump a whopping 70% in 2024, which would be a big turnaround following this year's estimated decline of 35%. This explains why analysts are anticipating Micron to deliver eye-popping growth in fiscal 2024 and beyond.
| Fiscal Year | Revenue Estimate (in Billions) | Year-Over-Year Change (in %) |
|---|---|---|
| 2023 | $15.4 | -50% |
| 2024 | $20.3 | 32% |
| 2025 | $28.2 | 39% |
Data source: YCharts. Chart by author.
However, the memory industry needs to recover strongly if Micron is to deliver such impressive gains. That's why it would be a good idea for investors to wait for more concrete signs of a turnaround before they consider buying Micron.
The stock's solid rally this year and the sharp decline in earnings have made it expensive. Micron is trading at 77 times forward earnings right now, well above the five-year average forward price-to-earnings ratio of 17. The rich valuation and near-term headwinds that Micron is facing suggest that it is too late to buy the stock now.
However, the stock has historically done well during a memory boom cycle, and something similar could happen once again if its revenue and earnings growth start accelerating.
That's why investors would do well to keep a close eye on the company's progress, as an improvement in the memory market's fortunes could supercharge its growth, bring down its valuation to reasonable levels, and help the stock deliver healthy gains in the long run.
