Memory chips are a commodity, and boy, has it been a year for commodities. After plummeting consumer electronics sales and, later, a downturn in some data center hardware, companies like Micron Technology (MU 2.92%) have been working through excess inventories. Not even trimming its workforce and temporarily throttling some of its production lines have saved Micron from a horrific year.
It appears the worst is in the rearview mirror. Micron is reporting incremental improvement, and is even predicting 2025 will be a record year for the memory chip market. Wall Street is buying it. Shares are up 36% so far in 2023. But is it too late to buy?
Micron mounts a (small) comeback
Micron just closed out its fiscal 2023 (the 12 months ended in August 2023) with a sequential increase in revenue and progress on getting back to breakeven. Revenue was $4 billion, up 7% from the previous quarter. Net losses tallied up to $1.43 billion, better than the $1.9 billion loss last quarter, but still not great. It's been a long way down from the last top in early 2022.
Data by YCharts.
The fiscal year did end with cash from operating activities in positive territory, at $1.56 billion, mostly due to backing out the $1.83 billion inventory write-down realized earlier this year (reducing the value of product that hasn't been sold yet). But subtracting cash expenses on property and equipment (including breaking ground on the company's new chip packaging facility in India) means free cash flow was negative $6.1 billion.
The balance sheet ended the year in still-decent shape considering the horrific year the memory chip market had. Cash and short-term investments were $9.6 billion and long-term investments were $844 million, offset by total debt of $13.3 billion.
The market has hit bottom, but how high will Micron fly?
Micron and its big South Korean memory chip peers Samsung and SK Hynix are now eyeing better times ahead. Chip inventories for consumer electronics will need to normalize for memory sales to improve, and this should start to kick in by early 2024. But real growth markets are starting to kick in. Automotive industry sales continued to hit new highs for Micron last year, and data center AI servers need lots more memory chips.
Together, this is what makes Micron and the chip industry think it's headed for new highs by 2025. There's still lots of work to be done. The question now is just how big the market for memory chips will get, and how much of it Micron will capture.
New technologies, like HBM3E (enhanced third-gen high-bandwidth memory), will be needed for applications in artificial intelligence (AI) and such. Demand is insatiable, but price per bit of memory will no doubt continue to decline, making it difficult to say how high the next up cycle will carry Micron and its peers.
But until then, consensus Wall Street expectations for fiscal 2024 aren't a terrible place to start. Net income per generally accepted accounting principles (GAAP) is expected to remain negative, but free cash flow is expected to turn positive at about $400 million. It's not a great outlook. It helps underscore just how deep this downturn has been, perhaps the worst since the dot-com bubble popped.
For all its faults, Micron has had its moments -- especially during periods when memory chip demand flips from bad to hot commodity -- though the stock hasn't been a market-beating investment over the last two decades.
Data by YCharts.
Based on the outlook for the next 12 months, though, Micron is hardly cheap. There's a long slog ahead before robust profitability makes a comeback. I'm still not ready to call Micron one of the best chip stocks to buy right now, as other companies and chip types have better pricing power from top secular growth trends.
