Micron Technology: weakness ahead, but is it already in the price?

Stock Of The Week: Micron Technology

Weakness ahead, but is it already in the price?

Micron’s earnings report last week seemed to confirm the market's fears. The bullwhip effect is reverberating right along the supply chain, and excess inventory isn’t just sitting in big box retail warehouses.

To quickly recap, the bullwhip effect is a feedback loop. Consumer demand at the end of the supply chain informs ordering decisions right along the chain back to the initial suppliers. When demand is excessively strong, retailers over order from manufacturers, who also over-order from their suppliers.

Each error is amplified, and the end result is inventories that are well out of line with the actual consumer demand. Like this:

Source: The Loadstar

However, Micron’s earnings report started out extremely positively. Here’s what CEO Sanjay Mehrotra had to say (emphasis added)

“Micron delivered record quarterly revenue with strong profitability and free cash flow, enabled by our team’s excellent execution and our industry-leading technology and product portfolio. Micron achieved revenue records in the auto, industrial and networking markets, and in SSDs for both data center and client. Our NAND business delivered record quarterly revenue, and our Embedded Business Unit and Storage Business Unit NAND revenues also hit all-time highs”

Record revenues and strong profitability. Why isn’t the stock soaring?

Forward guidance told a very different story.

“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.”

In non-corporate language, that equates to “we’re going to make fewer chips this year, while we try to clear some of the excess inventory we’re sitting on into an environment of slower demand”.

Which might prove a tough task if demand forecasts are correct. Research firm Gartner forecasts that worldwide PC shipments could decline by 9.5% in 2022, while mobile phone demand is ‘on pace’ to fall by 7.1%.

Now, there’s every chance that the market has already sniffed this out. The bullwhip effect was widely anticipated, and recession fears are front and centre in market minds and commentary. Micron’s stock price has nearly halved this year.

Just shy of $100 in January, to just above $50 in July. What a wild six months! However, this raid price reset could be seen as an opportunity by forward-looking or longer term investors.

Take a look at these updated price ratios:

• Price to Earnings Ratio (TTM) 6.3
• Price to Revenue Ratio (TTM) 1.9
• Price to Book (FY) 1.4
• Price to Sales (FY) 2.27

Pre-pandemic, Micron was trading with a price to earnings ratio of 25.2. That’s now dropped to 6.3. It’s not inconceivable that a mentality of “this too shall pass” could prevail.

Although recession concerns rose after the Atlanta Fed’s running estimate for US GDP printed at -2% for Q2 2022, the strong employment picture is often cited as a reason for optimism that any recession would not be too severe.

Key questions moving forward. Is there more weakness ahead for Micron? Or does the recent drop fairly reflect the fundamentals of the stock?

Not investment advice. Past performance does not guarantee or predict future performance.