Did Micron Just Signal the Semiconductor Downturn Is Over?

One of the top memory-chip makers, Micron Technology (NASDAQ: MU), just had another incredibly ugly quarter. Sales in fiscal 2023's second quarter were more than halved from the year prior to $3.69 billion (for the three months ended March 2). Net loss was a whopping $2.3 billion, which includes a $1.43 billion non-cash charge to write down the value of inventory.

Things aren't exactly going to get much better in the third quarter for Micron either. However, management provided some commentary on the current demand situation from customers (weak demand is what caused the excess inventory in the first place) which indicates the nasty semiconductor industry slump is just about finished. Micron itself may not be a top buy just yet, but certain other chip stocks certainly might be.

Micron's personal guidance was terrible, but industry guidance was solid

As a manufacturer of a basic commodity that goes into the more complex chip systems designed and made by others, chipmakers like Micron often wind up "taking one for the team" when semiconductor sales go south.

This current downturn has been especially brutal, though (re-read those quarterly numbers mentioned above). Following a supply shortage in 2020 and 2021, Micron and other chipmaker peers' supply started to rise just in time for customers to start tapping the brakes on orders. I might mention here that the chip shortage was partly due to said customers slamming the brakes on orders when lockdowns started in early 2020, and then placing orders like crazy later in 2020 because their inventory was too slim. Micron, like a typical commodity product company, has taken it on the chin.

MU Revenue (Quarterly) Chart

Data by YCharts.

It will get worse for Micron before it gets better. Fiscal 2023 Q3 guidance (at the midpoint) is for revenue to be $3.7 billion, down 53% year over year. Earnings per share should be negative $1.79, compared to positive $2.34 last year.

How could any of this be construed as good news? CEO Sanjay Mehrotra said on theearnings call "We now believe that customer inventories have reduced in several end markets, and we see gradually improving supply demand balance in the months ahead."

In other words, Micron will return to growth on a quarterly sequential basis in the second half of calendar year 2023. That doesn't mean Micron will return to all-time highs (or robust profitability, for that matter) anytime soon.

But Micron's report is fantastic news for the rest of the semiconductor industry, which overall isn't quite as radically cyclical as Micron. In fact, Micron said it believes its sales to data center customers (which include AI) bottomed this past quarter. PC, laptop, and smartphone memory chip inventories have improved, paving the way for growth in the second half of calendar year 2023. And the automotive segment -- a market Micron has excelled in -- actually grew 5% year over year last quarter.

Full steam ahead for chip stocks?

Micron's earnings were undeniably ugly, but it did provide further confirmation for what other chip companies have been saying now for months: The industry will return to growth mode this year.

Month-to-month or quarter-to-quarter financial results are no way to base an investment for the long term. This is especially so in the chip industry. It's manufacturing, which is almost always going to exhibit ups and downs, versus the more stable consistency of software that builds atop the work of semiconductors.

Nevertheless, though this has been a nasty downturn, the semiconductor market is expected to exhibit market-beating growth potential in the years ahead as things like AI, automotive technology, and more efficient energy systems take over as primary growth drivers of the economy.

I'm not calling Micron stock a top buy just yet (I already own some, and I'm remaining cautious given the next quarter will likely be another awful one). But the semiconductor slump is coming to an end. It appears the next up cycle is just around the corner, and many chip stocks still look like a great buy.

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Nicholas Rossolillo and his clients have positions in Micron Technology. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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