Memory chip manufacturer Micron Technology (MU 6.93%) has been mired in one of the worst downturns in the industry's history. Demand for DRAM and NAND chips has fallen off a cliff, and pricing has tumbled far quicker than Micron has been able to reduce costs. Industrywide production cuts and slimmed-down capital spending plans were enacted in an attempt to bring supply and demand back into sync.
Micron's last quarterly report was not encouraging. While revenue did edge up from the previous quarter, it was down substantially year over year. Micron also reported a negative gross margin and an enormous net loss. With $4.01 billion in revenue, the company booked a net loss of $1.43 billion.
Micron's guidance wasn't particularly optimistic, either. While revenue was pegged at $4.4 billion for the first quarter of fiscal 2024, about 10% higher sequentially, gross margin was still expected to be negative.
Micron burned through prodigious amounts of cash in fiscal 2023 as it weathered impossible market conditions. For the full year, free cash flow was a loss of $5.45 billion. The good news is that the pricing environment appears to be improving beyond what Micron originally assumed. The company's comeback, while likely still a slow affair, may be set to accelerate.
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Key Data Points
Boosting guidance
Micron updated its guidance for the first quarter of fiscal 2024 on Nov. 28 to reflect improving market conditions. The new outlook calls for revenue approaching $4.7 billion, about $300 million above the midpoint of the company's previous outlook.
Gross margin is still expected to be negative, but less so. On a generally accepted accounting principles (GAAP) basis, gross margin is now expected to be between negative 2.5% and negative 2%. Operating expenses will be higher than expected, driven by the timing of research and development expenses.
During a technology conference following the guidance update, Micron CEO Sanjay Mehrotra also reiterated that the company expects 2025 to be a record year for the memory chip industry. That will require a recovery in demand and a recovery in prices.
One thing that will drive growth for Micron is specialized high-bandwidth memory, or HBM, chips used widely in AI accelerators. Not only is demand for HBM expected to expand, but this rising demand will also reduce the supply of non-HBM memory available and potentially aid in pushing prices higher. AI servers also require more standard memory, including DRAM and NAND chips. Micron estimates that a typical AI server uses 6 to 8 times as much DRAM and 2 to 3 times as much NAND as a standard server.
What could go wrong?
Memory chips are commodities, and all commodity markets can go through boom-and-bust cycles.
- Too much supply leads to tumbling prices.
- Tumbling prices lead manufacturers to slash production and cut down on growth investments.
- Lower production stabilizes prices and can potentially lead to a shortage.
- A shortage pushes up prices.
- High prices induce manufacturers to ramp up supply.
- Too much supply leads to tumbling prices, and we're back to the beginning.
Sustained price increases will require Micron and the rest of the industry to keep a lid on production. It's unclear how much excess manufacturing capacity exists that could be turned back online quickly. It takes a long time and billions of dollars for new memory chip production to be built, which is one reason industry cycles play out over a span of years. But it also only takes one spoiler focusing on market share rather than profits to ruin the party.
2024 is almost certain to be a better year for Micron than 2023, although how quickly revenue and profit recover depends on end-market demand and continued caution from all industry participants. Both are highly uncertain.
