Micron Q3 2022 Earnings: Why Fear Was Warranted (NASDAQ:MU)

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Sunrise in the spring at Micron Technology

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After Thursday’s bell, we received third-quarter fiscal quarter results from memory and storage solutions leader Micron Technology (NASDAQ: MU). In recent weeks, there has been some fear about the DRAM and NAND market debilitating. Unfortunately for investors, the company confirmed that things are, in fact, quite difficult at the moment, which sent the shares to a new annual low.

In recent days, we have received fairly low analyst ratings from both Barclays and Citi. Both analysts are calling for the company to lose third-quarter numbers and provide weak guidance. However, during the reported quarter, revenue was basically in line with estimates, depending on which site you use, and non-GAAP earnings per share were up more than a penny on the street. Total revenue increased 16.4% year-over-year, while adjusted revenue increased from $ 1.88 to $ 2.59.

As Barclays noted, spot NAND prices have fallen 8% in the last quarter, while DRAM has dropped 12%. Consumer markets have weakened as fears of a recession are definitely hurting the US and the war between Russia and Ukraine is not helping Europe. The only question analysts seemed to ask was how weak the orientation would be, and the answer turned out to be much worse than even the bones were looking for.

Analyzing the current quarter, Micron expects fourth-quarter revenue to be between $ 6.8 billion and $ 7.6 billion, and adjusted earnings per share will be between $ 1.43 and $ 1.83 per share. Analysts expected Micron to generate $ 9.05 billion in revenue and a guide to adjusted earnings of $ 2.62 per share. The Citi analyst, for example, which lowered its target price from $ 15 to $ 85 this week, was still more than $ 1 billion above the company’s midpoint, even though it was already asking for an error of orientation. Here is the key quote from Micron CEO Sanjay Mehrotra’s press release:

Recently, the demand environment of the sector has weakened and we are taking steps to moderate supply growth in fiscal year 2023. We rely on long-term secular demand for memory and storage and are well positioned to deliver good financial performance between cycles.

Last month, the average estimate of street revenue for the fourth quarter had fallen by about 5%, but that still meant growth of around 10% over the previous year. Now, Micron is actually gearing up for a significant top-down drop, which doesn’t set things right when its corporate year ends. The Citi analyst this week alone had lowered its August 2023 revenue estimate from $ 40 billion to $ 33.5 billion. That figure seems much more realistic now given Micron’s orientation, as the street was nearly $ 37.8 billion in Thursday’s report.

We’ve now seen these ups and downs in the NAND and DRAM markets several times before, but at this point the good news is that Micron is still solidly profitable, something that didn’t always happen in previous downlink cycles. In the third quarter, the company was able to generate more than $ 1.3 billion in adjusted free cash flow. However, spending most of that to buy shares at an average price of about $ 71 seems like it’s badly scheduled now. Sure, management needs to adjust its supply here, as balance sheet inventory increased by about $ 1.1 billion (or 24%) over the past year, but the guidance calls for sales to decrease a just over a billion dollars (or about 13%). ) in the current quarter.

Initially in the off-hours session, Micron shares fell nearly 10%, reaching a new 52-week low of $ 50.10 before recovering and even becoming positive at one point. given a while later. The average target price on the street was $ 95 in this report, but obviously that figure will go down a bit as analysts reduce their numbers going forward. The chart below shows Micron’s stock over the last 5 years and I have added the purple line to show where I think a long-term support fund could be had.

5-year performance

Micron last 5 years (Yahoo! Finance)

Right now, that potential fund would be about $ 47, but I don’t know if the shares would fall that much in the short term unless U.S. markets go down a little more in the coming weeks. I’ll be curious to see if we see another guide in Micron’s fourth quarter report, because another weak forecast would likely bring stocks to that level of support. However, the business cycle should increase at some point, so it could be a buyer when we see analysts ’estimates begin to stabilize and gain more clarity about the supply image in the medium term.

In the end, it turned out that all the fear in Micron’s earnings report was more than justified. While fiscal third-quarter results were decent, the company pushed fourth-quarter revenue and earnings well below what even most bearish analysts thought we might see. With soft DRAM and NAND prices as consumer spending seems a bit pressured, Micron shares reached a new 52-week low in the off-hours session. While I still believe in the company in the long run, we need to see estimates go down to more realistic levels before looking for stocks in the fund.

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