To The Moon

After the bell on Wednesday, semiconductor giant $Micron Technology(MU)$ released its first quarterly report for fiscal year 2023 ending Dec. 1. Its shares fell nearly 2% after hours after the earnings report and guidance fell short of market expectations.

Key figures were very poor:

• Q1 revenue of $4.085 billion, down 46.9% year-over-year.
• Quidance for Q2 gross margin of 7.5%, compared to 47.2% a year ago.
• The company announced the suspension of bonuses and a 10% layoff.

Statistically, Micron is having a really bad time. But looking at the stock price performance, the less than 2% after-hours drop seems to be uneventful. How to understand Micron Q1 earnings?

Key Figures

• Q1 revenue of $4.085 billion, down 46.9% year-over-year, less than the market expectation of 4.133 billion.

The degree of this decline exceeded last round of semiconductor downturn.

data from company's earnings

• Q1 net income loss of $195 million, compared to a profit of $2.3 billion in the same period last year.

• Adjusted net income loss of $39 million, significantly below Bloomberg analysts' forecast of $16.73 million.

data from bloomberg

The above 2 figures can signify the horror of the semiconductor down cycle. Nobody can ever imagine that a semiconductor giant that once made $6.4 billion a year would have seen its revenue go back to 5 years ago overnight and the profit turned into a loss.

• Inventory reached $8.36 billion in the first quarter, a 25.5% jump from the previous quarter.

data from company's earnings

By businesses

PC market declines in the double digits in 2022, while management expects declines to narrow to low to mid-single digits in 2023.

Smartphones are expected to decline 10% year-over-year in 22 and sales are forecast to be flat in 2023, with year-over-year or slightly higher.

Automotive memory demand, while under macroeconomic pressure, is expected to grow strongly in 23. This is mainly due to the popularity of in-car entertainment systems and smart driving. Automotive DRAM and NAND are expected to grow at twice the rate of the overall market over the next 5 years;

Industrial market continues to weaken in Q1, but sales are expected to improve in the second half of FY23.

Why are Layoffs and pay cuts nothing new for semiconductor companies?

Micron could only reduce expenses to cope with the down cycle.

1. The company scaled back its capital expenditures for FY2023, lowering its previous target of $8 billion to $7-7.5 billion, a nearly 40% reduction from FY2022 spending of $12 billion. This pessimistic expectation will continue into FY2024.

2. The company reduced production capacity, laid off 10% of its workforce, and reduced management salaries and all-employee bonuses.

But this does not surprise the market. 4.085 billion in revenue still falls within the 4.25 billion ± 250 million guidance range the company gave in its last quarterly earnings report.

Earnings indicate the stock price is close to the bottom

Most importantly, the worse quarterly results may mean the company is close to the bottom.

According to the company's guidance for the next quarter,

Q2 revenue was between $3.8 billion ± $200 million, down about 51.2% year-over-year, but with a significantly lower MoM decline.

data from bloomberg

Referring to the last semiconductor down cycle, the stock bottomed out when quarterly revenue improved sequentially.

Micron forecasted a significant narrowing of the next quarter's revenue decline to 6% YoY in its Q3 FY2019 earnings report, and the stock price successfully bottomed out after the earnings.

According to management's statement on the call,

most customers' inventories are expected to be down to a healthy level by 2Q FY23. Meanwhile, Micron's inventory is also expected to top out in Q2 and gradually improve over the next few quarters.

Bottom line

In summary, Micron expects revenue to improve in the second half of FY23 compared to the first half.

After a sharp decline, Micron's P/E is approaching the bottom of the 2019 semiconductor downcycle. As the industry de-stocks and the Fed rate hike comes to an end, the semiconductor will welcome a reversal.

data from bloomberg