Stock of the week: Micron
Mr Market’s giving Micron a tough time. The last time we checked in with the chipmaker, the stock was trading just below $60. The relief rally stalled out just above $65, and the stock has fallen to fresh 2022 lows under $51. The earnings report is due on Thursday and could provide a fresh impetus.
The demand environment continues to weigh on the chip industry as a whole, not just Micron. Recent export data from South Korea was less than encouraging. Chip exports fell 26% YoY in August.
South Korea controls roughly two-thirds of the global memory market through Samsung & SK Hynix, so the Korean data provides an important gauge of global demand. Micron was the third largest memory chipmaker in 2021.
Micron CEO Sanjay Mehrotra told investors that they would be taking action back in July:
“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.”
These two issues will be crucial for markets when the company reports on Thursday.
- How is the demand outlook?
- Is supply growth moderating?
Wells Fargo’s Aaron Rakers maintains an overweight rating, but highlights the weakening fundamentals:
“The set-up into MU’s upcoming (9/29) F4Q22 results appears very negative, as DRAM and NAND industry fundamentals continue to weaken”
Again, this should not come as a surprise. It’s more a question of how bad things get before anyone can seriously anticipate a recovery.
Stifel analyst Brian Chin believes that the uncertainty surrounding the depth and duration of the current downcycle is the biggest challenge to overcome, and expects the chipmakers to react sooner and faster than they have in prior instances.
“Pricing pressure and customer inventory burn-off is already causing revenue and margins to roll-over from a May 2022 peak, and we project further deterioration into midCY23”
“We believe memory suppliers are apt to be more proactive than in prior downcycles with more aggressive actions to control supply, a key signal to force an earlier bottom/abbreviated downturn”
As for the numbers, FactSet/MarketWatch have the lowdown:
Based on surveys of 29 analysts, Micron on average is expected to post adjusted earnings of $1.41 a share, down from the $2.82 a share expected at the beginning of the quarter. Micron forecast fourth-quarter net income of $1.43 to $1.83 a share.
According to 28 analysts polled by FactSet, Wall Street expects revenue of $6.81 billion from Micron, down from the $9.56 billion forecast at the beginning of the quarter. Micron predicted revenue of $6.8 billion to $7.6 billion.
A key question now is if there’s room for a positive surprise given the much lower expectations. Although future earnings uncertainty is high, markets could decide that the lower stock price represents a fairer valuation and begin to lift the offer.
That said, it may take some time for a clear perspective to emerge. Recession appears unavoidable, and chips are a cyclical industry!
Not investment advice. Past performance does not guarantee or predict future performance.
