Driven by the sharp and sustained decline of DRAM prices, shares of Micron (MU) have been in a steady downtrend over the past year, falling some 33% in twelve months, and almost 50% year to date. But are things as bad as the stock’s performance might suggest?
The semiconductor giant is set to report fourth quarter fiscal 2022 earnings results after the closing bell Thursday. Aside from DRAM weakness, the company has also dealt with supply chain headwinds in a memory market which were already highly volatile to begin with and it adjusts to commodity-like prices to match fluctuations in demand. The company is also dealing with rising interest rates which has likely pressured demand for consumer PCs — a market that Micron relies on.
Given that products for consumer devices accounts for some 55% of Micron's revenue (memory and solid-state storage drives), rate increases still pose a significant risk to Micron’s business. During the company’s investor day presentation in May, Micron management noted that consumer-focused segments of its business would drop by seventeen percentage points in the next three years. To maintain profitability, Micron is expected to slash expenses by up to 40%, according to Citigroup analyst Atif Malik.
Analyst Vijay Rakesh of Mizuho also raised concerns last week surrounding weak pricing and downgraded Micron stock to Neutral from Buy and lowered the price target to $56 from $75. It remains to be seen whether the the costs cuts meets the profitability goals Micron expects. While the company is working to offset revenue risk by growing its datacenter business, the company will need to issue strong guidance that instills confidence that memory pricing can rebound in the quarters ahead.
For the quarter that ended August, the Boise, Idaho-based company is expected to earn $1.30 per share on revenue of $6.69 billion. This compares to the year-ago quarter when earnings came to $2.42 per share on revenue of $8.27 billion. For the full year, earnings are projected to be $8.18 per share, up from $6.06 per share a year ago, while full-year revenue of $30.81 billion would rise 11.2% year over year.
Wit full-year profits still expected to rise 35% year over year, it’s hard to justify the level of punishment the stock has endured. Meanwhile, in terms of execution, the company also has topped consensus revenue and profit estimates in eleven out of the past twelve earnings reports, demonstrating a strong track record. Despite the company’s demonstrated operating strength, analysts at Barclays and Citigroup forecasted for Micron to miss on both the top and bottom lines and provide weak guidance.
The company, however, delivered a beat on both measures, delivering revenue of $8.64 billion which rose 16.4% year over year, while adjusted earnings soared 38% year over year from $1.88 to $2.59. During the quarter, the company generated more than $1.3 billion in adjusted free cash flow. This brought its operating cash flow to $3.84 billion, compared to $3.56 billion for the same period a year ago and the prior quarter level of $3.63 billion.
“Recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth in fiscal 2023,” said Micron CEO Sanjay Mehrotra. “We are confident about the long-term secular demand for memory and storage and are well positioned to deliver strong cross-cycle financial performance.”
During the quarter, NAND spot pricing fell 8%, while DRAM is down 12%, but Micron continues to execute. On Thursday investors will also look for any silver lining related to pricing headwinds and supply chain struggles that suggests Micron remains well-positioned for the longer term.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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