Micron's Results Provide Hope Of A Chip Industry Turnaround

The largest US maker of memory chips gave hope that the industry slump might be coming to an end by issuing a better-than-expected outlook. Just hours before Micron Technology Inc NASDAQ:MU released its better-than-expected guidance, German chipmaker Infineon Technologies AG (OTC:IFNNY) also raised its own forecasts for the quarter and the full year on the back of stronger-than-expected automotive sales.  

Fiscal Second Quarter Figures

For the quarter that ended on March 2nd, Micron saw its revenue drop 53% to $3.69 billion as a reflection of a weak demand for PCs and smartphones, making an adjusted loss of $1.91 a share as orders collapsed. Micron is on course to lose more than $3 billion this year, possibly labelling 2023 as the worst annual deficit since the company first went public in 1984. As part of its cost-reduction program, Micron will be trimming its workforce by about 15%, up from its previous 10% headcount reduction that was announced with a slowdown in innovation investments.

Fiscal Third Quarter Guidance

Sales are expected to amount $3.9 billion, exceeding analyst estimates of $3.75 billion as customer inventories are getting better and a gradual improvement is expected in the industry's supply-demand balance, suggesting the market is in for a comeback after a rough patch considered as the industry's worst downturn over the past 13 years.

2023

While revenue is expected to improve sequentially during the second half of the year as end markets are contracting less severely, profitability will remain a challenge. Annual spending on new plants and equipment will be lowered by 40% to $7 billion. 

An Unstable Environment

CEO Sanjay Mehrotra said that Micron delivered earnings for the second quarter that were in line with projections in a challenging market environment shaped by a steep dropped in demand as customers have been working through excess inventory. Chip manufacturers have been struggling with an exceptionally weak pricing environment while still recovering from pandemic-induced supply shortages while facing a global crisis brought on by the war in Ukraine. Micron's peers South Korea's Samsung Electronics Co. and SK Hynix Inc. SK have also suffered losses, and curbed expansion plans as a result, but Samsung's diversified business allowed it to remain profitable with ample cash to invest.

Dynamical fluctuations in the supply and demand balance often makes producers sell the components for less than the cost to make them, so despite shipping more computer memory chips, Micron still saw its revenue contract as prices dropped about 20%.

The Good Side

The industry now has a small number of competitors who are more focused on profits than gaining market share which is making the field more resilient. Also, memory chips now have a more diverse range of applications as they are present in almost everything. All in all, these factors enabled Mehrotra to state that Micron is able to provide more stability in earnings compared to previous downturns. 

The Beaten Down Industry May Be On The Verge Of A Turnaround Thanks To AI

Mehrotra believes that Micron is well positioned to capitalize on opportunities that AI is bringing to the table, just like Advanced Micro Devices Inc NASDAQ:AMD, Intel Corporation NASDAQ:INTC and Nvidia Corporation NASDAQ:NVDA, which hosted its GTC developers conference last week. If Mehrotra is right, Micron would return to growth after three consecutive quarters of declines. Moreover, he believes that with further supply cuts, recovery could be accelerated.