The market has been sniffing out a cyclical downturn in the semiconductor industry for some time now, and memory chip makers have Micron Technology (mu 3.23%) Finally confirmed it’s here. Micron did report record annual revenue for its recently completed fiscal 2022 ($30.8 billion, up 11% from 2021), but the final quarter of the year (ended Sept. 1) was a dud. Things won’t get better until the start of fiscal 2023.
Shares of Micron were down 44% so far in 2022 before sales plummeted. How far will it fall before the market gets wind of the next memory chip bull run?
Micron’s fiscal 2022 ends with a bang
Micron’s fourth quarter fiscal 2022 revenue was $6.64 billion, down 23% from the third quarter and down 20% from the fourth quarter of 2021. Chief Executive Sanjay Mehrotra said the computing hardware market has deteriorated significantly since the last earnings update three months ago, and the downturn is starting to look tame and now looks more ferocious. Remember that Micron is a highly cyclical manufacturing company, and a pullback in customer demand typically happens every few years or so.
However, Mehrotra and the top team explained that the confluence of events was a sharp drop in mission memory sales. For the first quarter of fiscal 2023, revenue at the midpoint of guidance is expected to be $4.25 billion, down approximately 45% from the same period last year. As is typical of these sales cycles, lower manufacturing capacity means lower profitability. Adjusted earnings per share for the first quarter are expected to be just $0.04, down from $2.16 last year.
In other words, Micron stock may look cheap at just 6.74 times trailing 12-month EPS as of this writing. But as earnings dry up in the coming quarters, the P/E ratio will get higher and higher. If the downturn lasts long enough, Micron could eventually report a net loss for the full year.
2023 roadmap to guide you
China’s ongoing pandemic-related blockade, Russia’s war in Ukraine, inflation, and aggressive rate hikes by the Federal Reserve are all contributing factors to the current situation. In addition, there are still shortages of some chip components. Memory chips are a fundamental computing system commodity, so inventories of memory chips have been building up while end-equipment makers waited for other basic components. As a result, these manufacturers have put new orders from Micron on hold for now.
Overall, Micron still sees long-term demand for memory and computing hardware rising sharply over the next decade (thanks to cloud computing and automotive technology). But near-term production will need to be scaled based on current conditions. Mehrotra said the company will reduce output at its memory factory. While the company plans to invest $40 billion in U.S. manufacturing over the remainder of the 2020s, it is currently cutting capital expenditures (property, plant and equipment) for 2023.
The good news: It’s too early, but Micron believes the industry inventory issues will be resolved in the first half of 2023. By the second half of next year, Mehrotra believes demand for memory chips will outstrip supply.
How low could Micron stock fall?
It looks like the current cyclical downturn could continue for another two to three quarters — assuming Micron’s current outlook for customer demand and inventory issues is resolved by mid-2023. However, as in the past, the market will try to sniff out the bottom before it actually happens, and even if earnings deteriorate, Micron stock could rise from here.
I choose to play it safe for another quarter or two. If the global economy gets worse in the coming months due to rapidly rising interest rates, Micron’s revenue and profitability could fall more sharply than expected. On the plus side, it’s a more profitable company than in the past, as management promised. With more than $9.3 billion in cash and short-term investments, another $1.6 billion in long-term investments, and just $6.8 billion in debt, the chip factory is in better shape than in past downturns.
To be sure, Micron Technology stock could go lower from here if economic conditions worsen. However, management expects that the industry may improve next year. Micron could be nearing a bottom in the coming months as long-term growth trends like cloud computing and artificial intelligence, automotive industry technology and 5G mobile networks are still in play. If you’re an investor in these tech movements, this top microchip stock might be worth averaging at dollar cost right now as the company tries to find a bottom.