Buy, Hold or Sell Before Earnings: Micron Technology (MU)

Micron Technology, Inc. (MU), a manufacturer of innovative memory and storage solutions, reported fiscal 2023 third-quarter revenue of 5.69 billion, surpassing the analysts’ estimate of $3.68 billion, but down 100.6% year-over-year. Further, the company missed the consensus revenue estimates in three of the trailing four quarters, which is disappointing.

MU incurred a third consecutive loss during the quarter, but it was better than the analysts’ expectations. The company posted a quarterly non-GAAP net loss of $1.43 per share, compared to the consensus estimate of $1.53 per share.

Micron is among the semiconductor companies most affected by the pandemic-induced supply-chain disruption and the demand-supply imbalance the industry is experiencing. Adding to the problems, the Chinese government imposed a ban on the sale of MU’s memory and storage chips earlier this year.

Following this, the memory chipmaker warned of a bigger revenue hit from the China ban, putting at risk about half of its revenue from China-headquartered companies, which equates to a low-double-digit percentage of its total revenue.

To this, the Cybersecurity Administration of China (CAC) in May said that MU failed its network security review and it would block operators of key domestic infrastructure from purchasing the company’s products.

MU is scheduled to release its fiscal 2023 fourth-quarter earnings report on September 27, after the market’s close. The guidance issued by the company projects revenue of approximately $3.90 billion and a non-GAAP net loss of $1.19 per share. The company forecasts a non-GAAP gross margin of nearly negative 10.5% and non-GAAP operating expenses of around $845 million.

“Market recovery can accelerate if there is further reduction in industry production and these cuts are sustained well into calendar 2024. In response to the industry environment, Micron has taken decisive actions to bring our supply back in balance with demand. We expect Micron’s year-on-year bit supply growth to be meaningfully negative for DRAM,” said Micron’s CEO Sanjay Mehrotra at its last earnings call.

“We also expect to produce fewer NAND bits in calendar 2023 than in calendar 2022. Our fiscal 2023 CapEx plan of $7 billion is down more than 40% from last year, with WFE down more than 50%. We continue to expect fiscal 2024 WFE to be down year-on-year,” Sanjay Mehrotra added.

Despite prevailing headwinds, shares of MU have surged 6.8% over the past month and 18.4% over the past six months to close the last trading session at $68.88.

Here are some factors that could influence MU’s performance in the upcoming months:

Debt Activity

On April 11, 2023, MU issued a $600 million principal amount of 5.375% senior unsecured notes due April 15, 2028, and received proceeds of $596 million. In addition, the company issued a $900 million principal amount of 5.875% senior unsecured notes due September 15, 2033, and obtained proceeds of $890 million.

On April 13, MU used a portion of the proceeds from the debt issuance to prepay a $600 million principal amount of its senior term loan A due October 2024.

As of June 1, 2023, the company’s total liabilities were $20.28 billion, compared to $16.38 billion as of September 1, 2022.

Deteriorating Financials

For the third quarter that ended June 1, 2023, MU’s revenue decreased 56.6% year-over-year to $3.75 billion. Its non-GAAP gross margin came in at negative $603 million, compared to $4.10 billion in the corresponding period of 2022. The company reported a non-GAAP operating loss of $1.47 billion, compared to a non-GAAP operating income of $3.14 billion in the prior year’s quarter.

Furthermore, the company incurred non-GAAP net loss of $1.57 billion and $1.43 per share versus a non-GAAP net income of $2.94 billion and $2.59 in the comparable period of 2022, respectively. Its adjusted free cash flow stood at negative $1.36 billion, compared to $1.31 billion in the previous year’s period.

Disappointing Historical Growth

MU’s revenue has decreased at a CAGR of 3.5% and 8.3% over the past three and five years, respectively. Also, the company’s EBITDA declined at a CAGR of 13.6% and 22%, respectively, over the same period.

Unfavorable Analyst Estimates

Analysts expect MU’s revenue for the fourth quarter (ended August 2023) to decrease 40.9% year-over-year to $3.93 billion. The company is expected to report a loss per share of $1.18 for the to-be-reported quarter.

In addition, Street expects the company’s revenue for the fiscal year 2023 to decline 49.7% from the previous year to $15.46 billion. MU is further likely to report losses for at least two fiscal years.

Low Profitability

MU’s trailing-12-month gross profit margin of 9.03% is 81.5% lower than the 48.82% industry average. Moreover, the stock’s trailing-12-month EBIT margin and net income margin of negative 14.21% and negative 16.02%, unfavorably compared to the respective industry averages of 4.51% and 2.03%.

Furthermore, the stock’s trailing-12-month levered FCF margin of negative 23.78% is lower than the industry average of 7.20%. Its trailing-12-month ROCE and ROTC of negative 6.15% and negative 2.78% compared to the industry averages of 1.01% and 2.13%, respectively.

POWR Ratings Show Weakness

MU’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MU has an F grade for Growth, consistent with its poor financial performance in the previously reported quarter and bleak historical growth.

Also, the stock has a D grade for Stability. Its 24-month beta of 1.23 justifies its Stability grade.

MU is ranked #80 among 92 stocks in the D-rated Semiconductor & Wireless Chip industry.

Beyond what I have stated above, we have also given MU grades for Sentiment, Value, Quality, and Momentum. Get all MU ratings here.

Bottom Line

In the last reported quarter, MU’s revenue fell significantly year-over-year, and the company incurred massive losses and generated negative adjusted free cash flows. The memory chipmaker would continue to be affected by the demand-supply imbalance.

Also, the Cyberspace Administration of China’s decision made earlier this year is a significant headwind likely impacting MU’s outlook and slowing its recovery. Since China and Hong Kong account for nearly a fifth of its revenues, the company’s top line will likely remain under pressure in the upcoming quarters.  Also, its bottom line is expected to remain in negative territory in the near term.

Given MU’s disappointing financial performance, poor profitability, and bleak growth prospects, I think avoiding this chip stock before earnings could be wise.

Stocks to Consider Instead of Micron Technology, Inc. (MU)

The odds of MU outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three stocks rated A (Strong Buy) or B (Buy) from the Semiconductor & Wireless Chip industry instead:

Renesas Electronics Corporation (RNECF)

United Microelectronics Corporation (UMC)

ChipMOS Technologies Inc. (IMOS)

For exploring more A and B-rated chip stocks, click here.

What To Do Next?

Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today’s volatile markets:

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MU shares were trading at $68.94 per share on Monday morning, up $0.06 (+0.09%). Year-to-date, MU has gained 38.47%, versus a 13.70% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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