MU - From Preannouncement To The UBS Conference: Micron's Journey Ahead

2023-11-30 05:15:43 ET

Summary

• Micron Technology's stock experienced a minor decline due to inflated expectations, but end-of-year pricing trends and an improved FY24 outlook indicate a promising future.
• The company's preannouncement revealed expectations for improved pricing trends and positive gross margins in FY24, driven by supply control and recovering pricing.
• Insights from the UBS conference highlighted MU's resilience, strategic acumen, and focus on emerging opportunities, making it an attractive investment for high-risk tolerance investors.

As we close the year, Micron Technology, Inc. ( MU ) offered a snapshot into its future by preannouncing its earnings while simultaneously attending the 2023 UBS Global Technology Conference. The company's stock experienced a minor decline, a result of inflated expectations rather than a critique of the company's inherent value, in our view. Despite the short-term market disappointment, the end-of-year pricing trends and an improved FY24 outlook, as revealed in the preannouncement, indicate a promising future. The insights gleaned from the UBS conference further underscored Micron's resilience and strategic acumen in navigating the complex semiconductor landscape. We note that Micron's earnings can be highly volatile and thus are only appropriate for investors with a high-risk tolerance.

Preannouncement Analysis

Upon evaluating the recent preannouncement of earnings results by Micron Technology, we observe several noteworthy trends and projections. Notably, the company's stock decreased by a low single-digit percentage following the preannouncement. This decrease, however, seems to stem more from inflated market expectations rather than a reflection of the company's inherent performance or value.

End-of-year pricing trends are on the rise, driven by gains in High-Bandwidth Memory and the normalization of customer inventory levels. These factors are helping to balance supply-demand dynamics. While this development may have heightened market expectations, leading to some short-term disappointment, it bodes well for the company's longer-term prospects.

The preannouncement also revealed MU's expectations for fiscal year 2024 (FY24) pricing trends. Management anticipates continued improvement, which would bring about a positive Gross Margin. MU revised its F1Q guidance upwards in the preannouncement. The new projection places revenue at $4.7bn at the midpoint, up from $4.4bn. This change has resulted in an EPS guidance of -$1.00, which includes a ~10% increase in Operating Expenses. The revision is primarily driven by an improved pricing outlook, aided by continuous supply control in both Dynamic Random Access Memory ((DRAM))/NAND segments.

The FY24 outlook for MU has improved as well, according to the preannouncement. The company expects its GMs to turn positive in F2Q, earlier than the previously projected F3Q. This is a direct result of recovering pricing and lessening underutilization headwinds. Furthermore, MU expects its inventory days to be within a few weeks of its 120-day target by F3Q24. This suggests a significant inventory reduction of over $1bn over 1H FY24.

UBS Conference Key Insights

Attending the 2023 UBS Global Technology Conference offered us the opportunity to gain valuable insights into the operations and outlook of Micron Technology, a leading player in the semiconductor industry. Micron's executives spoke with conviction about their performance and future prospects, providing an encouraging picture of the company's resilience and strategic acumen.

Firstly, we were impressed by Micron's financial performance, which exceeded their own previous expectations. The company is on track to achieve around $4.7 billion in Q1 revenue, outperforming the high end of its initial forecast. This financial strength underscores Micron's effective execution strategies and its ability to navigate market uncertainties and supply chain challenges successfully.

Further, we were encouraged by Micron's positive outlook on pricing for the remainder of the year. The company expects a positive gross margin percentage in FQ2, driven by improved pricing and disciplined supply management. The expected reduction in operating expenses in the fiscal second quarter further strengthens the outlook for the company's performance, suggesting that Micron's profitability struggles may soon be behind them.

The company's forward-looking strategies and innovative drive, as conveyed by CEO Sanjay Mehrotra, were particularly compelling. Micron's focus on their HBM3E product, currently undergoing qualification with a major customer, is a testament to their commitment to staying at the forefront of technology. The expected production ramp in early 2024 promises to contribute significantly towards revenue in the latter part of the fiscal year.

Looking into the future, Micron's confidence in a record year for the industry in 2025, with 2024 being the year of recovery, speaks volumes about its belief in the robustness of the semiconductor market. The company's disciplined approach to managing capital expenditure (CapEx), operating expenditure (OpEx), and supply, even as pricing conditions improve, underlines its commitment to financial prudence and resilience.

Micron's keen understanding of market dynamics and readiness to leverage emerging opportunities was evident in its outlook on demand trends. They anticipate robust demand drivers across various end-market segments, including increased memory requirements in smartphones, PCs, and AI servers. The company's focus on AI, a key growth driver, is commendable and shows its readiness to embrace and capitalize on technological advancements.

Addressing potential concerns about latent wafer capacity flooding the market as conditions improve, Micron has strategically diverted underutilized equipment toward ramping up new technology nodes. This strategic reduction in wafer production capacity shows that Micron is prepared for an upturn in demand while maintaining a delicate supply-demand balance.

Financial & Valuation Analysis

Note: All historical data in this section comes from the company's 10-K filings, and all consensus numbers come from FactSet.

Micron Technology's latest earnings, reported on September 28, 2023, show a company experiencing some turbulence. Despite meeting revenue expectations of $4,010 million, the 39.6% year-over-year decline, coupled with a gross margin of -10.8% and an operating margin of -31.7% (down from 24.6% a year ago), demonstrate significant challenges. The stock responded accordingly, trading down -4.4% on the day after earnings. These numbers paint a picture of a company grappling with serious headwinds in a volatile semiconductor market.

However, it's not all doom and gloom. Looking at the financial trends, the company's revenue has declined at a CAGR of -10.2% over the past three fiscal years, but sell-side consensus predicts a turnaround with expected revenue growth of 35.0% this fiscal year, reaching $21.0 billion, and another 42.3% growth the following fiscal year, reaching $29.8 billion.

Margins have also taken a hit, with MU's EBIT margin decreasing by 48.8% points from 16.0% to -32.8% over the past three years. Yet, consensus is forecasting EBIT margin to expand by 2,542 basis points this fiscal year to -7.4% and another 2,844 basis points the following fiscal year to 21.0%. This suggests that despite the company's current struggles, there is a clear path to profitability on the horizon, if consensus proves to be correct.

MU's capital allocation strategy also warrants attention. Over the past three years, the company spent just 2.0% of its revenue on share-based compensation, and at the same time, saw a decrease in diluted outstanding common shares by 1.4%. This suggests that management has been using share repurchases to more than offset shareholder dilution - a positive sign for investors.

Still, it's important to remember that Micron operates in a highly capital-intensive industry. Over the past four years, the company's CapEx as a percentage of revenue averaged a hefty 43.1%. This, coupled with a -4.0% FCF margin and a projected free cash flow of -$842 million this current fiscal year, is cause for concern.

Turning to valuations, MU currently trades at an EV/Sales multiple of 2.8, an EV/EBIT multiple of 13.5, a P/E multiple of 14.1, and a FCF multiple of 21.3. Despite these seemingly high numbers, when compared to the S&P 500, MU is trading at an EV/Sales premium of 18.0%, an EV/EBIT discount of 20.2%, a P/E discount of 23.9%, and an FCF discount of 0.6%. This shows that, relative to the broader market, MU's stock is reasonably priced, especially considering the expected improvement in its financial performance.

Micron Technology has had a challenging year, but its projected growth figures and the fact that its stock returned 33.7% in absolute return over the past year (outperforming the S&P 500 by 19 points) indicate a potential turnaround. While the company's financial struggles and the capital-intensive nature of the industry can't be ignored, neither can the company's promising revenue and margin growth forecasts. Given these factors, Micron Technology's stock could be a compelling proposition for investors with a high-risk tolerance looking for exposure to the semiconductor industry.

Conclusion

Micron Technology Inc. seems to be a company that is strategically navigating its challenges while capitalizing on its opportunities. Despite the short-term market disappointment, the company's revised FY24 outlook and the insights gleaned from the UBS conference portend a promising future. Notably, the company's resilience and strategic acumen are evident in its steps toward recovery, driven by improved pricing trends, disciplined supply control, and robust demand drivers across various end-market segments.

Moreover, Micron's financial projections indicate a potential turnaround. Despite the current struggles, the projected revenue and margin growth, coupled with the company's strategic capital allocation, suggest a path to profitability and a high potential for returns. Therefore, for investors with a high-risk tolerance and a keen interest in the semiconductor industry, Micron's stock appears to be an attractive investment proposition, with its relatively reasonable valuation compared to the broader market. As Micron continues maneuvering through the semiconductor landscape, it's a story worth watching.

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