Micron stock closed down 16.2% after it posted quarterly revenue and earnings in line with analyst estimates but spooked investors with its soft forward guidance.
Micron earnings always get a lot of attention. It reports off cadence to other chip makers, so it has the stage to itself. It is one of three large non-Chinese memory manufacturers, and the only one domiciled in the U.S. Memory sales can also reveal clues about the broader ecosystem.
There is one growth hardware business in 2024: data center equipment for the AI infrastructure buildout. This drove Micron's revenue expansion for its fiscal first quarter, up 84% from last year, and up 12% from last quarter. Data center revenue was up 400% on the year, and 40% from last quarter, now representing over half of Micron's revenue.
Investors have focused on the rocket growth of Micron's data center business, but now softness in consumer markets is creating concerns. Mobile and internet-of-things end markets were down a combined 15% from last quarter, though still up 11% on the year. Growth in its storage business has flattened out.
But what really rattled investors was Micron's fiscal second-quarter guidance, with revenue projected to fall 9% sequentially. In the past, that has often spelled trouble for the stock.
"The reasons that excite investors in owning Micron, AI data centers, are more secular than cyclical," Cantor Fitzgerald analyst CJ Muse told Barron's. "The disappointment was much worse-than-expected outlook for the more cyclical side of the business: smartphones, PCs, auto, etc."
The semiconductor sector is a cyclical business, and nowhere is this more evident than in memory. Manufacturers see regular inventory cycles up and down, and this leads to large rates of both sales growth and shrinkage as prices fluctuate.
In its annual report, Micron warns that, "We have experienced significant volatility in our average selling prices and may continue to experience such volatility in the future. In the past five years, annual percentage changes in DRAM average selling prices have ranged from plus low-teen percentage range to a minus high-40% range"
In the fiscal third quarter of 2024, Micron revenue was up 82% from the previous year, while in the same quarter in 2023 it was down 57%. As investors learned in 2023, Micron's gross profit can even be negative in a downturn.
Investors look at these sales swings and are always waiting for the next cycle to begin. During an up cycle like now, the anticipation is that it will end at some point, and maybe abruptly. Many investors have been swept up in a sudden shift in the winds, and don't want to be blown away again.
So many investors saw Micron's disappointing second-quarter guidance and looked for the exit. Could this be the end of Micron's big upcycle? Right now there are dueling impetuses.
Data center spending is at a record high, and the hyperscalers like Amazon, Microsoft and Google are telling investors that they won't be reducing investment soon, but that the growth rates in their capital expenditures will moderate. At the same time, consumer markets have been weak since 2022, and don't look like they are picking up steam headed into 2025. Micron's storage business is also showing signs of potential future weakness.
Investors are asking themselves: Is second-quarter guidance a blip or a bellwether?
"I think it's a blip," John Vinh of KeyBanc Capital Markets told Barron's. "I think we've got a couple of quarters of friction here, and once you get through that, things should start to recover again in the second half of 2025."