Micron Technology (NASDAQ: MU) posted its third-quarter earnings report on June 30. The memory chipmaker’s revenue rose 16% year over year to $8.64 billion, which matched analysts’ expectations. Its adjusted net income increased 35% to $2.94 billion, or $2.59 per share, which also cleared the consensus forecast by $0.15.
Micron’s growth rates were stable, but its guidance was grim. For the fourth quarter, it expects its revenue to decline 13% year over year and its adjusted earnings per share (EPS) to tumble 33%. Analysts had expected its revenue and adjusted EPS to increase 10% and 7%, respectively.
Micron’s stock dipped only slightly after the company provided that gloomy outlook, which suggests that a lot of bad news had already been baked into its 40% decline this year. Should investors buy this cyclical chip stock today?
The cyclical slowdown is finally here
The memory market, which primarily consists of DRAM and NAND chips, is highly cyclical. The sector’s previous slowdown caused Micron’s revenue to decline year over year for six consecutive quarters throughout fiscal 2019 and 2020, which ended in September of that calendar year.
After that drought ended, Micron’s revenue rose for nine consecutive quarters. Its revenue rose 29% in fiscal 2021 and grew 24% year over year to $24.1 billion in the first nine months of fiscal 2022. Unfortunately, Micron’s forecast for the fourth quarter indicates that streak will finally end.
Micron’s shipments climbed over the past two years as the growth of the cloud and data center markets, brisk sales of PCs, and the expansion of the auto and industry 4.0 markets sparked fierce demand for more memory chips. During its second-quarter report in March, Micron said it still saw a “healthy supply-demand balance” across the DRAM and NAND markets.
But during its third-quarter presentation, Micron said its expectations for the industry had “moderated” since its previous earnings call, primarily due to supply chain challenges and softer demand for PCs and smartphones. In response, it plans to take “immediate action” to curb its supply growth.
In other words, Micron previously underestimated the industry headwinds, and it’s now slamming on the brakes before it floods the market with cheap chips — which could cause another supply glut like the one in 2019 and 2020.
However, it’s also clear that the memory market’s cyclical downturn has started again, and investors should brace for more revenue declines. For the entirety of calendar 2022, Micron expects the industry’s bit demand growth to remain “below the long term CAGRs of mid-to-high teens.”
Its margins are declining
Micron’s adjusted gross margin fell 50 basis points year over year and 40 basis points sequentially to 47.4% in the third quarter. It attributed that decline to a higher mix of lower-margin NAND chips, which brought in 26% of its revenue, as opposed to higher-margin DRAM chips, which accounted for 73% of its top line. However, its average selling prices for both DRAM and NAND chips still declined sequentially in the third quarter. It expects its adjusted gross margin to drop to about 42.5% in the fourth quarter.
Its operating margin rose 450 basis points year over year and 110 basis points sequentially to 36.4%, but that expansion was mainly caused by the timing of its technological developments and product qualifications this year instead of the intentional reduction of its operating expenses.
It plans to curb its operating expenses over the next few quarters as it reins in its production to cope with the “current market conditions,” but it still expects those costs to rise sequentially in the fourth quarter (due to the timing issues) before the savings kick in and meaningfully boost its operating margins.
Is Micron too cheap to ignore?
During the conference call, Micron’s CFO, Mark Murphy, said the market’s “long-term demand trends remain constructive,” but that select market weakness and macroeconomic uncertainty” would affect the company’s “near-term outlook and visibility.”
Micron’s stock initially looks dirt cheap at just five times next year’s earnings and less than two times next year’s sales. However, those valuations are also pinned to analysts’ optimistic estimates for 14% revenue growth and 20% earnings growth in fiscal 2023.
Those forecasts will likely be reduced to account for Micron’s downbeat guidance, so its actual valuations could be much higher. That said, Micron would still be cheap relative to other chip stocks like AMD (NASDAQ: AMD) and Nvidia (NASDAQ: NVDA), which trade at 20 and 29 times forward earnings, respectively.
However, investors should note that AMD and Nvidia also sell a broader range of chips and aren’t “pure plays” on the memory market like Micron. Most of Micron’s direct competitors — including Samsung and Western Digital (NASDAQ: WDC) — also produce products besides cyclical memory chips.
Step away from Micron (for now)
Micron is still a solid chipmaker, but investors shouldn’t buy a cyclical stock right after its growth hits a multiyear peak. For now, investors should stick with less volatile tech stocks until Micron’s near-term outlook stabilizes.
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