shares Micron Technology (mu -1.10%) Down 47% over the past 12 months, the company’s fiscal first-quarter 2023 results, released last week, suggest things will get worse for the chipmaker before it starts to turn around later in 2023.
The memory specialist’s revenue fell sharply in the latest quarter ended Dec. 1, slipping to a loss compared with profit a year earlier. Guidance for this quarter suggests tough times will continue for a while. However, management expects that the memory industry’s fortunes could start to turn around in mid-2023 as customers begin to replenish chip inventories.
Let’s see if Micron is in a better position a year from now.
Weak memory demand weakens Micron
Micron’s fiscal first-quarter revenue fell sharply by 47% year-on-year to $4.1 billion, due to a decline in memory shipments and a sharp drop in prices. This has also led to a sharp drop in profit margins. The company’s adjusted gross margin fell to 22.9% from 47% a year earlier.
Not surprisingly, Micron posted an adjusted loss of $0.04 per share, compared with a profit of $2.16 a year earlier. The company’s guidance suggests things are about to get worse. Management expects an adjusted gross margin of just 8.5% for the quarter, down nearly 40 percentage points from a year ago. The company guided for an adjusted loss per share of $0.62, compared with a profit of $2.14 per share in the year-ago period.
Analysts are pessimistic about a turnaround for the full fiscal year, expecting a 42% drop in revenue to $17.9 billion and an adjusted loss of $0.10 per share, compared with $8.35 per share in the previous fiscal year.
That’s not surprising, as demand for memory chips has weakened following a decline in sales of personal computers (PCs) and smartphones.
Demand for memory chips deployed in servers and graphics cards has also slowed. All of this has created an oversupply of memory chips. As a result, prices for dynamic random-access memory (DRAM) chips are expected to decline by 13% to 18% this quarter, down from a 10% to 15% drop in the third quarter.
That explains Micron’s miserable guidance. But at the same time, management did say that 2023 could be a turning point.
Things will change in the next few months
CEO Sanjay Mehrotra said on the latest earnings call that “customer inventories, which impact near-term demand, are expected to continue to improve, and we expect most customer inventories to be reduced to relatively healthy levels by mid-2023. Therefore, we expect Revenue in the second half of the fiscal year will improve compared to the first half of the fiscal year.”
But Mehrotra did add that profitability could “remain challenging until 2023”. But investors can expect improved demand for memory chips to lead to higher profit margins, as companies in the space are cutting investment and scaling back production amid weak demand.
Micron’s forecast for memory demand improvement is in line with other third-party forecasts. So things may start to improve for Micron in the second half of 2023 as demand for memory chips picks up, but it may take a while to get back into balance and prices start to move higher.
Specifically, DRAM bit demand is expected to grow by only 8.3% in 2023, which would be the first time in history that growth has been below 10%. Coupled with production cuts by companies like Micron, which has reduced output by 20%, the memory industry may be close to achieving supply-demand balance.
But it may take until 2024 for Micron to recover. PC sales are expected to rebound in 2024, while smartphone sales are expected to gain momentum from the second half of 2023. The price declines that the steep memory industry is witnessing should lessen as demand starts to pick up and supply tightens.
As a result, Micron is expected to deliver substantially improved performance in fiscal 2024, which will begin in September 2023. Analysts forecast 42% revenue growth and a return to profitability in FY2024, followed by another solid year in FY2025.
MU EPS estimates for current fiscal year; data from YCharts.
As a result, Micron may be in a better position a year from now, though for that to happen there are a few important things that need to happen first: improving demand and tightening supply.
Investors would do well to keep an eye out for a potential turnaround and keep this tech stock on the watch list for 2023, as it has done well during the memory boom cycle.
