Micron Technology (MU) , the semiconductor industry's leader in memory chips, released the firm's fiscal second quarter financial results on Tuesday evening. To say that these results are "ugly" would be to put it mildly. Yet, the stock is showing some reliance overnight. Let's explore.
For the three month period ended March 2nd, Micron posted an adjusted EPS of a loss of $1.91, badly missing the firm's own prior guidance of a loss of $0.82 and Wall Street's consensus view of a loss of $0.86. GAAP EPS came to a loss of $2.12. The firm took an inventory write-down of $1.43B, which works out to $1.43 per share. The firm drove revenue of $3.693B. This number also missed its number, though less dramatically, That said, this number represents a year over year contraction of 52.6%.
Cost of goods sold increased 19.2% to $4.899B. This took gross margin down to $-1.206B from the year ago comp of $+3.676B. Those are not misprints. After accounting for R&D, administrative costs and asset impairments, the firm's operating income/loss dropped to $-2.303B from $+$2.546B a year ago. After figuring interest and taxes, net income dropped from $+2.263B for the year ago period to $-2.312B. In terms of awfulness, this quarter would be pretty tough to beat.
Fundamentals
Sure you're ready for more? Over the past six months, operating cash flow has dropped from $7.566B a year ago to $1.286B. After capital expenditures printed at $4.654B (which was down), free cash flow for the half year is $-3.368B. This compares to $1.69B for the first half of the fiscal year prior.
Turning to the balance sheet, Micron ended the quarter with a cash position of $10.818B and inventories of $8.129B. Cash was up from three months ago, while inventories were modestly lower. That's good news. Current assets total $21.898B, while current liabilities add up to $5.255, leaving the firm with a still robust current ratio of 4.167, and a quick ratio of 2.62, which is far better than merely good enough.
Total assets amount to $66.52B. This includes just $1.638B in goodwill and other intangibles. That number is no problem at all. Total liabilities less equity comes to $19.263B including $12.037B in long-term debt.
The debt load is a little much, but when all is said and done, this is one heck of a nice balance sheet. Micron has had to and will likely need to continue to lean on this balance sheet in order to maintain business operations and support things like the dividend while free cash flow and net income remain negative.
Guidance
For the current quarter, Micron sees revenue of $3.7B (+/- $200M), which is just about what Wall Street was looking for. The firm sees gross margin of 23% GAAP or 21% (adjusted), with a "margin" for error of 2.5% using either metric. Operating expenses are seen at $1.07B (GAAP) or $900M (adjusted). This projection allows for room of $15M up or down.
As for profitability, Micron sees an adjusted EPS of a loss of $1.58 (+/- $0.07), which is considerably lower than the loss of $0.90 that Wall Street had in mind. Micron sees GAAP EPS at a loss of $1.79 (+/- $0.07).
During the call, CEO Sanjay Mehrotra added, "Our expectations for calendar 2023 industry bit demand growth have moderated to approximately 55 in DRAM and low-teens percentage range in NAND, which are well below the expected long-term CAGR of mid-teens percentage range in DRAM and low 20s percentage range in NAND."
Readers can easily see that Micron has topped a lousy quarter with weak guidance. Why? Mehrotra went on to say that the firm now expects to spend about $7B on CapEx for the year, which comes to a 40% reduction, while reducing DRAM and NAND wafer starts by 25%. Year on year bit supply growth is now expected to be meaningfully negative.
In addition, the firm continues to reduce operating expenses beyond executive salary cuts and the company-wide suspension of bonuses. The firm expects overall headcount reductions to approach 15%.
Lastly and perhaps most optimistically, Micron expressed an opinion last night that sales in data center chips had "bottomed" and that demand for PC and gaming chips would improve during the second half of the year.
Wall Street
There is a ton of interest in this name. Since these results were released last night, I have found 16 sell-side analysts that are both rated at four stars or greater by TipRanks and have opined on MU. After allowing for changes, we are left with 11 "buy" or buy-equivalent ratings, three "hold" or hold-equivalent ratings and two "sell" or sell-equivalent ratings.
The average target price across these 16 analysts is an even $69, with a high of $100 (Hans Mosesmann of Rosenblatt Securities) and a low of $45 (Harsh Kumar of Piper Sandler). Once omitting these two as potential outliers, the average target across the other 14 analysts drops to $68.50. The stock closed at $59.28 on Tuesday night. For those looking for more detail the average target across the 11 "buys" came to $75.45, while the average target among the five less enthusiastic analysts was $54.80.
My Thoughts
Am I going to get fired up because Micron thinks the bottom is in for the data center? Am I to get all that excited as the firm aggressively cuts costs in response to now consecutive money losing quarters and expectations for more? The balance sheet remains strong, but not operating or free cash flows. This is a tough stock or sector (memory) of the industry to love right now.
One other thing that bothers me. The two lowest opinions expressed from my informal survey of analysts shows that the two most negative opinions came from analysts that I follow closely and simply trust. I already told you that one was Harsh Kumar of Piper Sandler, who is rated at five stars by TipRanks. Kumar has an "underperform" (sell-equivalent) rating on MU with a $45 target price. The other is Joseph Moore of Morgan Stanley who is also rated at five stars by TipRanks. Moore rates MU as an outright "sell" with a $46 target price.
These two "brilliant" gentlemen apparently see what we see.
Micron has been in a basing pattern (range bound) since breaking out of that downtrend that lasted from early January 2022 through September of that year. Other semis not involved in the memory space, but more into the cutting edge of high tech support at an elite level such as Nvidia (NVDA) and Advanced Micro Devices (AMD) have done much better this year and remain my picks (and longs) among the semis.
Micron does show decent Relative Strength of late as well as an improving daily MACD (Moving Average Convergence Divergence). There may be some upside from this morning's $61 and change pre-opening last sale, but as is easily seen, breaking above $65 will be quite the task as the business is just plain "not good" right now. The stock, for the bulls, needs to hold the 50 ($59) and 200 ($57) day SMAs (simple moving average) through the next broad market selloff.
Until then, I would rather short this stock as close to $65 as possible than buy it above those two moving averages as I believe they will be tested.
