There is nothing more costly than a bear cycle in a commodity business like DRAM. Stocks pile up, customers cut orders, prices drop, and everyone suffers. To get an idea of how you feel, look no further than Micron Technology, Inc. (NASDAQ: MU), one of the world’s largest memory chip manufacturers that has just supplied an industry-leading tips of C3Q22 revenue 21% below Street consensus.
Granted, Micron’s C2Q22/F3Q22 results were largely in line with estimates. Although revenue of $8.6 billion (+15% YoY) and gross margin of 47.4% were slightly below consensus, operating margin of 36% was in line and EPS adjusted $2.59 was a good pace from Street’s $2.43. Additionally, the company generated $1.3 billion in free cash flow, spent $981 million on share buybacks, and intended to buy more shares at current levels with $12 billion in cash on the balance sheet.
Despite strong results in Q2Q22, management provided a disappointing outlook for Q3Q22 as demand for smartphones and PCs turns out to be worse than expected. Specifically, PC unit sales for 2022 are expected to decline 10% YoY (vs. flat prior period/30 million units lower) and smartphone units are expected to decline by a mid-digit (vs. compared to a stable prior period/130 million units lower).
- Revenue of $7.2 billion +/- $400 million vs. consensus of $9.14 billion.
- Gross margin of 42.5% against 47.9% consensus.
- Operating margin of 27.9% against 37.1% consensus.
- Adj. EPS of $1.63 +/- $0.2 vs consensus of $2.57.
Understandably, shares fell the day after Micron’s June 30 earnings release, but have more than recouped the loss since. This shows that investors have been anticipating a kitchen sink guide from management for some time. A slowdown in the smartphone and PC market in 2022 should come as no surprise after a strong 2021 when demand exploded under the pandemic. Of course, the impact of the Russian-Ukrainian war, the Covid-19 shutdowns in China, and inflation have all contributed to the slowdown in demand.
Due to a weaker outlook for 2H22, Micron also expects industry bit demand in 2022 to grow below long-term CAGRs of 15% to 19% for DRAM and 27% to 29% for NAND. In consumer-focused end markets, smartphones and PCs are likely to see more inventory adjustments in the second half. Although demand in data centers is expected to remain strong thanks to the continued growth of cloud investments, it should be noted that PCs and smartphones still account for around 50% of global memory and storage demand in terms of bits.
Although things are likely to get worse over the next couple of quarters, the silver lining here is that Micron management is responding quite quickly by reducing WFE (wafer front-end) investments in FY23 from September 2022 and will use existing inventory to meet demand. forward. From a pricing perspective, we can see that the company is clearly prioritizing profitability over market share, a mentality that historically hasn’t quite aligned with the memory industry in general. .
We intend to maintain pricing discipline and withdraw from business that does not meet our pricing objectives. – Call on the results of the 3Q22 financial year
Overall, Micron is one of the first to recognize changing industry fundamentals by scaling its bit supply to come to terms with falling demand. Management also expects a 30% drop in QoQ sales from China and a 10% revenue impact in C3Q22/F4Q22. Overall, Street’s estimates have fallen dramatically, with revised FY23 EPS from $10.7 before Q2C22 to $6.8 after earnings, bringing the leading P/E multiple from 5.3x to 8.3x.
Longer term, the outlook for memory demand remains solid, driven by ongoing investment in data centers, automotive and industrial. Micron expects its revenue mix to shift from 55% in consumer markets (smartphones and PCs) to 45% in higher growth areas (data center, automotive, graphics, industrial and networking) in 2021 to 38% and 62% in 2025, respectively. As the business gradually moves into areas with secular tailwinds, demand cyclicality should improve accordingly.
If history is any guide, management believes inventory adjustments will take 2 quarters to complete. The situation is somewhat similar to Target (TGT) (analysis here) and Walmart (WMT) (here), where both big box retailers are facing high discretionary inventory that will likely take 1-2 quarters to normalize. . Coming back to the semiconductor space, investors should also be aware that estimates for consumer-exposed companies are likely still too optimistic, and markets may also be more inclined to wait for more guidance. on kitchen sinks as companies report short-term earnings. coming.
Nonetheless, I view Micron’s guidance as a positive step in the right direction in light of today’s market fundamentals. Management has adopted the right mindset to run the business defensively to prioritize profit over market share. While many investors may believe the stock has bottomed at current levels following somewhat positive price action post earnings, I would prefer to remain cautious and monitor the situation for any further macroeconomic deterioration on the demand side of the equation.