Micron Technology (MU -2.95%) released its third-quarter earnings report on June 30. The memory chipmaker’s revenue rose 16% year-over-year to $8.64 billion, in line with analysts’ expectations. Its adjusted net income rose 35% to $2.94 billion, or $2.59 per share, which also beat consensus guidance by $0.15.
Micron’s growth rates were steady, but its forecasts were grim. For the fourth quarter, it expects revenue to decline 13% year over year and adjusted earnings per share (EPS) to fall 33%. Analysts expected its revenue and adjusted EPS to rise 10% and 7%, respectively.
Micron’s stock fell only slightly after the company provided the bleak outlook, suggesting that plenty of bad news had already been priced into its 40% decline this year. Should investors buy this cyclical chip stock today?
The cyclical downturn is finally here
The memory market, which mainly consists of DRAM and NAND chips, is very cyclical. The previous industry downturn caused Micron’s year-over-year revenue to decline for six consecutive quarters in fiscal 2019 and 2020, which ended in September of this calendar year.
After the drought ended, Micron’s revenue grew for nine consecutive quarters. Its revenue grew 29% in fiscal 2021 and 24% year-over-year to $24.1 billion in the first nine months of fiscal 2022. Unfortunately , Micron’s Q4 guidance indicates that this streak will finally end.
Micron’s shipments have increased over the past two years as growing cloud and data center markets, strong PC sales and expanding automotive and Industry 4.0 markets have spurred fierce demand for more memory chips. During its second-quarter report in March, Micron said it still saw a “healthy supply-demand balance” in the DRAM and NAND markets.
But in its third-quarter presentation, Micron said its expectations for the industry had “moderated” since its previous earnings call, mainly due to supply chain challenges and weaker demand. for PCs and smartphones. In response, it plans to take “immediate action” to curb the growth of its offering.
In other words, Micron previously underestimated industry headwinds, and it is now holding back before flooding the market with cheap chips, which could cause another supply glut like 2019 and 2020. .
However, it is also clear that the cyclical downturn in the memory market has resumed, and investors should prepare for further revenue declines. For the entire 2022 calendar, Micron expects industry bit demand growth to remain “below medium to high teen long-term CAGRs.”
Its margins are falling
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 the 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 revenue. However, its average selling prices for DRAM and NAND chips fell further sequentially in the third quarter. It expects its adjusted gross margin to drop to around 42.5% in the fourth quarter.
Its operating margin increased 450 basis points year over year and 110 basis points sequentially to 36.4%, but this expansion was primarily driven by the timing of its technology developments and qualifications of its products this year instead of the intentional reduction of its operating expenses.
It plans to cut operating expenses in the coming quarters as it rein ins production to deal with “current market conditions,” but still expects those costs to increase sequentially in the fourth quarter. (due to scheduling issues) before the savings kicked in and significantly increased its operating margins.
Is Micron too cheap to ignore?
On the conference call, Micron Chief Financial Officer Mark Murphy said “long-term demand trends remain constructive” but market weakness and macroeconomic uncertainty “would affect” the outlook and visibility. short term” of the company.
Micron shares initially look very cheap at just five times next year’s earnings and less than twice next year’s sales. However, these valuations are also tied to optimistic analyst estimates for 14% revenue growth and 20% earnings growth in fiscal 2023.
These forecasts will likely be reduced to account for Micron’s pessimistic outlook, so its actual valuations could be much higher. That said, Micron would still be cheap compared to other chip stocks like AMD (AMD -3.66%) and Nvidia (NVDA -4.20%)which trade at 20 and 29 times forward earnings, respectively.
However, investors should note that AMD and Nvidia also sell a wider range of chips and are not “pure players” in the memory market like Micron. Most of Micron’s direct competitors, including Samsung and western digital (WDC -3.15%) — also produce products in addition to cyclic memory chips.
Stay away from Micron (for now)
Micron is still a strong chipmaker, but investors shouldn’t buy a cyclical stock right after its growth hits a multi-year high. For now, investors should stick to less volatile tech stocks until Micron’s near-term outlook stabilizes.