I don't know what's worse...The quarter reported, or the guidance? Micron Technology (MU) went to the tape with the firm's fiscal first quarter financial results on Wednesday evening. The word "ugly" does not sufficiently describe what we saw.
For the three month period ended December 1st, Micron posted adjusted EPS loss of 0.04 (GAAP EPS: $-0.18) on revenue of $4.085B (-46.8% y/y). These results not only fell well short of the firm's original guidance provided three months ago, but also missed Wall Street's downsized expectations.
Wall Street had been looking for EPS of a loss of $0.01 on revenue of $4.14B. Three months ago, Micron had put the midpoint for this quarter's revenue generation at $4.25B that would provide for an adjusted EPS between $0.04 and $0.10.
Beyond the headlines, Micron posted a gross margin of 21.9%. Three months ago, the firm guided this item toward a range spanning from 23% to 27%. Operating expenses increased 18% to $1.102B, as operating income/loss ran from $2.631B a year ago to $-209M for the quarter reported. Net income/loss fell from $2.306B for the year ago comp to $-195M.
Guidance
For the current quarter, Micron is guiding toward revenue generation of $3.8B (+/-$200M), which is slightly below what Wall Street was looking for. The firm sees gross margin of 7.5% and adjusted gross margin of 8.5% and operating expenses of $1.08B (+/ $15M). This will lead to GAAP EPS of a loss of $0.79 (+/-$0.10) and adjusted EPS of a loss of $0.62 (+/-$0.10). Consensus view had been for EPS of a loss of $0.30, so this guidance is a real kick in the pants.
Micron has also announced that the firm will reduce its workforce by 10% and keep tightening its fiscal belt through 2023.
Balance Sheet & Cash Flow
Micron drove operating cash flow of $943M, down from $3.938B for the year ago comp. The firm spent $2.449B on property, plant and equipment, down from $3.265B a year ago. This put free cash flow for the quarter reported at $-1.506B, down from $+673M a year ago. Still, Micron repurchased 8.6M shares of common stock for roughly $425M. Hmmm.
The firm ended the quarter with a net cash position of $10.581B, inventories of $8.359B and current assets of $22.921B. That inventory number was up 25.4% over three months and up 72.9% from a year ago. Current liabilities add up to just $6.525B, leaving the firm's current ratio at quite robust 3.51. Sans the growing inventory burden, the firm's quick ratio still stands at 2.23. The business may be in a downturn, but this balance sheet remains in tip-top shape.
Total assets amount to $67.874B, including just $1.656 in "goodwill" and other intangibles. Total liabilities less equity comes to $18.568B. This includes long-term debt of $10.094B. While the overall health of this balance sheet is not in debate, the fact that this long-term debt-load is up 48% over the past three months does bear some level of increased observation going forward.
Wall Street
I have found 14 sell-side analysts rated at four stars or better at TipRanks who have also opined on MU since these earnings were released last night. Across the 14, there are eight "buy" or buy-equivalent ratings, four "hold" or hold-equivalent ratings and two "sell" or sell-equivalent ratings. Outright sell ratings are very rare on Wall Street, so this is somewhat alarming. Six of 14 ratings being for less than a "buy" is also quite alarming.
The average target price across the fourteen is $61.29, with a high of $100 (Hans Mosesmann of Rosenblatt Securities) and low of $45 twice (Harsh Kumar of Piper Sandler and Tristan Gerra of Robert W. Baird). Sans the high and one of those two lows, as outliers, the average target price across the other 12 drops to $59.42.
Beyond that, the average "buy" target across our eight optimists is $70.88, the average target across our four pragmatists is $50.00, and the average target across our two pessimists is $45.50.
My Thoughts
Micron trades at six times forward looking earnings. Right now, this stock is not cheap. The firm has a strong balance sheet. Outside of that, there really is not much to get optimistic about. The memory chip business stinks right now. The firm has a large and apparently still growing inventory problem.
CEO Sanjay Mehrotra told us during the conference call last night: "Due to the significant supply/demand mismatch entering calendar 2023, we expect that profitability will remain challenged throughout 2023." What more do we need to hear than that? Did those eight analysts with their "buy" ratings snooze through the call?
This stock spent most of 2022 in decline, only forming a consolidating base since last September. The shares already gave us a basic Fibonacci retracement and were rejected in mid-November. Relative strength is weak, the daily Moving Average Convergence Divergence (MACD) oscillator is in a bad place, and the stock just suffered a baby or swing-trader's death cross - the 21 day exponential moving average (EMA) crossing below the 50 day simple moving average (SMA).
The low point from the January through September selloff is just below $48. I would not be surprised in the least to see that low tested on Thursday or even crack in the coming days.
While I still have Advanced Micro Devices (AMD) and Nvidia (NVDA) in my most heavily traded portfolio, I have taken my exposure to semiconductors as a whole down off of the increased levels of the recent market-wide rally. The fact is that I have no exposure whatsoever to memory. For now, I think it uninvestable.
