Micron earnings: The memory chip slowdown seems far from over

The shares of Micron Technology Inc. are down more than 45% this year, but the memory chip specialist is not out of the woods as demand for its core product remains weak.

Micron MU,
is expected to report fiscal first-quarter results on Wednesday after markets close. Analysts expect this year’s unprecedentedly weak demand for memory chips to drift into 2023 and create another difficult year for Micron, making any forecast from executives a key part of the forthcoming report.

Micron executives went from a first-quarter loss of 6 cents to earnings of 14 cents per share on an adjusted basis and revenue of $4 billion to $4.5 billion in their latest earnings report, largely beating expectations. surpassed. Analysts had expected adjusted earnings of 69 cents per share on revenue of $5.71 billion.

For more: Micron earnings suggest the chip drop could be worse than Wall Street expects

The chipmaker from Boise, Idaho, specializes in DRAM and NAND memory chips. DRAM, or dynamic random access memory, is the type of memory commonly used in personal computers and servers, while NAND chips are the flash memory chips used in smaller devices such as smartphones and USB drives.

For most of the year, analysts have been concerned about the chip sector, which reached record high stock prices in early 2022 amid record sales and sold-out supply. That dynamic reversed in the latter part of the year, with analysts saying the sudden supply glut was worse than the one seen in 2019 after Micron executives described an “unprecedented” market downcycle.

While some analysts are beginning to think that the chip sector has already bottomed or will bottom out with a “soft landing” sometime in 2023, BofA Securities analyst Vivek Arya thinks the memory chip sector is on its way to a “hard landing” in DRAM early on. 2023.

“We find that DRAM downcycles have historically averaged about 3 quarters, and we expect this downturn to be no different,” said Arya, estimating a modest recovery in the second half of the year. Arya has a neutral rating on Micron.

“On the supply side, Samsung’s 005930,
decision to maintain flat capital investment [year over year] next year won’t help, though their commitment remains to be seen,” Arya said. “[SK] Hynix 000660,
and Micron have committed to a more than -50% cut in 2023 capex, which should help drive some price appreciation in the second half of the year.”

What to expect

merits: Of the 32 analysts polled by FactSet, Micron is expected to post an average of an adjusted loss of 2 cents per share, lower than the 95 cents per share estimate in net earnings expected at the beginning of the quarter. Estimize, a software platform that leverages crowdsourcing from hedge fund managers, brokers, buy-side analysts and others, is asking for adjusted earnings of 7 cents per share.

Revenue: Wall Street expects Micron to generate $4.13 billion in revenue, according to 29 analysts polled by FactSet. That’s lower than analysts’ consensus forecast of $6.22 billion at the start of the quarter. Estimize expects sales of $4.23 billion.

Analysts expect average DRAM sales of $3.11 billion and NAND sales of $1.05 billion, according to FactSet.

Stock movement: During Micron’s November-ending quarter, the stock was up 2% as the PHLX Semiconductor Index SOX,
rose 5.6% and the S&P 500 SPX,
rose 2.8% over the same period, compared to a 2.9% decline on the tech-heavy Nasdaq COMP,

The prior quarter, which ended in August, was the second straight period that Micron’s revenue fell short of analyst expectations, following a series of beats dating back to December 2018, when revenue was about 1% lower than Wall Street’s benchmark. Consensus . In the 15 quarters since then, the stock’s movement has split, rising eight times after earnings and falling seven times.

What analysts say

Cowen analyst Krish Sankar, who has an outperform rating on Micron, said demand for calendar 2023 is weaker than management expected in September, PCs are expected to fall into the mid-single digits and end demand remains weak.

“We are updating our Micron model to earnings, which reflects our November outlook [quarter] results to track to the bottom of guidance, followed by another decline that may be more important than some investors appreciate,” Sankar said. “The memory industry continues to grapple with an ‘unprecedented’ market correction [the first half of calendar year 2023]and price trends have further deteriorated from Micron’s view when it led at the end of September.”

Evercore ISI analyst CJ Muse, who has an outperform rating, said Micron is clearly not out of the woods yet.

“We expect a ~low-mid teens% underutilization burden for GMs in May [quarter] 2023 in connection with these actions,” Muse said. “We also think some headwind from underutilization cargoes could continue into August [quarter] as the expected timeline for supply and demand rationalization continues to stretch, especially given indications of a more aggressive Samsung investing counter-cyclically in NAND and possibly DRAM in 2023.”

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