Micron Technology Inc. presented an outlook that was far from the consensus view, raising questions about how the memory market will fare in a downturn.
The company expects August quarter revenue of $6.8 billion to $7.6 billion, while analysts tracked by FactSet had modeled $9.15 billion. Micron’s CEO acknowledged that “the industry’s demand environment has weakened,” pointing to pressures in the PC and smartphone markets.
Opinion: Chip boom likely to end as Micron says ‘downtrend’
were down nearly 6% in Friday morning trading.
Barclays analyst Tim O’Malley pointed out that while Micron has pointed to weaknesses in PCs and smartphones, it still doesn’t see demand problems in its data center business.
Micron’s outlook shortfall was “more substantial than expected, but not capitulating to the Data Center doesn’t leave the coast clear just yet,” he wrote.
“On the supply side, the company is doing everything right by reducing [capital expenditures], slowing bit development and shipping from inventory,” he added. “We believe consumer markets are weakening further and there are already signs of a slowdown in the server market that will lead to additional cuts.”
While the memory industry has historically been able to emphasize profitability in previous downturns, O’Malley wrote that “this cycle is likely much more severe than previous cycles, leaving a significant test, and the stock will likely trade sideways until then.”
O’Malley kept his overweight rating and $75 price target on the stock intact. Of the 36 analysts tracked by FactSet that cover Micron stock, 31 have an equivalent buy rating, while three rate the stock a hold and two rate it a sell
Bank of America’s Vivek Arya was no longer one of the bullish analysts as concerns beyond consumer end markets prompted him to downgrade Micron shares to buy-neutral.
“Even after a 20% loss, weak PC/smartphone demand (55%+ of sales) leads to increased inventory levels, which is expected to cause a multi-quarter slowdown,” he wrote. “Even outside of consumer markets, there are yellow flags coming up in cloud/enterprise customers, which could potentially extend the duration of the inventory correction.”
However, Arya seemed more optimistic about data center trends, writing that “[r]Regardless of the cycle, cloud data center spending remains strong and DDR5 is expected to grow in the second half of 2022 and beyond.”
CJ Muse of Evercore ISI believed that Micron was “tying a band aid” on its outlook and was bullish on the company’s approach to earnings.
“Micron plans to maintain price discipline and exit businesses with very low prices,” he wrote. “Micron is also reducing planned WFE [wafer-fab-equipment] are spending FY23 to reduce bit production with plans to reduce inventory to meet demand in CY23,” a move he expects to “weigh” on semiconductor equipment names.
(Shares of chip equipment companies Lam Research Corp. LRCX,
KLA Corp. KLAC,
Applied Materials Inc. AMAT,
ASML Holding NV ASML,
and Ultra Clean Holdings Inc. UCTT,
it was off more than 5% on Friday after Micron’s report.)
“Finally, it’s worth noting that Micron has a very new CFO [chief financial officer] – We have to believe there is some overconservatism in the updated outlook,” added Muse, while reiterating his outperform rating and “long-term price target” of $90.
Raymond James analyst Melissa Fairbanks viewed the demand challenges as “broadly expected given increasingly bearish macroeconomic concerns” and agreed that Micron appears to be making the right moves.
“[W]encouraged by the company’s commitment to protecting profitability, and while it may take time for the overall market to respond to signs of lower demand, MU’s decision to reduce bit production and lower capex for FY23 puts the company in a better position conditions of short-term turbulence – execution towards profitability targets between cycles,” he wrote.
Fairbanks maintained its strong buy rating but lowered its price target to $72 from $115.
Micron’s stock is down about 44% year-to-date, while the PHLX Semiconductor Index SOX,
is down 37.8% and the S&P 500 SPX,
has fallen 20.9%.