Making Sense of Micron
The Micron story has moved on since we put the chip company under the spotlight in early July:
CEO Sanjay Mehrotra set the scene when the company reported earnings:
“Recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth”
“Given the change in market conditions, we are taking immediate action to reduce our supply growth trajectory. To protect profitability, we will maintain pricing discipline, manage capacity utilization, and use inventory as a buffer to navigate through this period of demand weakness.”
Micron stock rallied. It seemed as if our question was answered. Demand weakness hadn’t phased the market at all.
Just how much demand weakness was ‘priced in’ though? That’s a key question, especially since the company filed an 8K report with the SEC (8K is a report of unscheduled material events or a corporate event).
The key points are less than encouraging:
- Recently, due to macroeconomic factors and supply chain constraints, we have seen a broadening of customer inventory adjustments. As a result, our expectations for CY22 industry bit demand growth for DRAM and NAND have declined since our June 30, 2022 earnings call, and we expect a challenging market environment in FQ4 22 and FQ1 23.
- FQ4 revenue may come in at or below the low end of the revenue guidance range provided in our June 30 earnings call.
- In FQ1, bit shipments are now expected to decline sequentially, and we expect significant sequential declines in revenue and margins. We expect free cash flow to be negative in FQ1.
- To address the near-term environment, today we are announcing new FY23 wafer fab equipment (WFE) capex reductions adding to the WFE capex reductions discussed in our June 30 earnings call, and now expect FY23 total capex to be down meaningfully versus FY22. (FQ = Fiscal Quarter, FY = Fiscal Year, CY = Calendar Year)
That makes for pretty grim reading. No business wants to see “significant sequential declines in revenue and margins” but it’s just a part of the mixed messages emanating from the company.
They’re forecasting a much bigger hit to demand than expected, and negative cash flows in Q1 2023, but according to sources they only plan to slow hiring, and there are no plans for layoffs to cut costs.
And, on the very same day the 8K was filed, this was also published by the chip manufacturer:
“Largest ever investment in U.S. memory manufacturing will create an estimated 40,000 American jobs, strengthen national security and bolster supply chain resilience”
The investment will be made over the next decade and is incentivised by the US CHIPS and Science Act. Micron President and CEO Sanjay Mehrotra said:
“This legislation will enable Micron to grow domestic production of memory from less than 2% to up to 10% of the global market in the next decade, making the U.S. home to the most advanced memory manufacturing and R&D in the world.”
Micron intends to invest $150 billion globally across the next decade. Over the past three years the company’s total revenues read as follows:
- 2019: $23.406Bn
- 2020: $21.435Bn
- 2021: $23.406Bn
It’s a bold strategy. Especially if the demand weakness extends beyond the few quarters that the company is forecasting…
Not investment advice. Past performance does not guarantee or predict future performance.
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