MU - Micron: No Reasons To Get Involved

2023-07-03 05:14:26 ET

Summary

• Micron Technology has seen a few tough quarters during which it reported big losses after even reporting negative gross margins.
• While the long-term outlook remains good, the current woes are bigger than I anticipated late in 2022.
• With shares having seen decent gains amidst optimism around artificial intelligence, I see no reasons to get involved here.

Around Christmas last year I concluded that shares of Micron Technology ( MU ) turned out to be cyclical after all. This came as shares were seeing a new downturn, although I believed that shares were nearing the lows.

While the company posted losses, it was, and still is, well capitalized. Appeal was increasing based on average estimated earnings power through the cycle, but I failed to see a reason to get involved just yet when shares traded around the $50 mark at the time.

Shedding Some Perspective

The history of Micron has been full of boom and bust cycles for its products, resulting in sharp volatility in topline sales, not to mention on the bottom line. Back in 2010, the company was an $8 billion business which posted break-even results, operating in a competitive commodity like business. Sales doubled to $16 billion by 2015, accompanied by big earnings of around $3 billion. After a few years of stagnation, sales doubled again to $30 billion in 2018, with operating profits increasing to $15 billion, translating into outright sky-high margins.

The company saw another retreat in 2019 and 2020, when sales fell to $21 billion in 2020 with operating profits down to $3 billion. Pegging average sales across the cycle around $25 billion and believing that average margins might come in around 20%, earnings power through-the-cycle of around $3.50 per share looked quite compelling with shares trading at $50, given a modest net cash position as well.

What followed was a strong 2021 performance, on the back of the post-pandemic recovery in the economy. 2021 revenues rose to $27 billion with GAAP earnings reported at $6 billion, equal to more than $5 per share. That only told part of the story as the company ended 2021 with revenues trending at more than $30 billion a year, accompanied by margin gains as well. In the end, the company posted fiscal 2022 results in September of that year with revenues reported at $31 billion, with GAAP earnings of $8 billion coming in around $8 per share.

The issue is that fourth quarter results fell to a run rate of $25 billion a year, and first quarter sales for the fiscal year 2023 fell to just $4.1 billion (as reported in December 2022). Moreover, after posting spectacular earnings, GAAP losses came in at $195 million for the quarter. Net cash balances fell to $1.8 billion on the back of the losses and elevated net capital spending (although actual cash holdings still stood around $12 billion).

There was no quick recovery in sight as the company guided for second quarter sales to fall to $3.8 billion, with adjusted losses seen increasing from $0.04 per share in the first quarter, to $0.62 per share in the second quarter. This was worrying, as the $600 million shortfall on the bottom line was in fact twice as large as the forecasted retreat on the topline.

With the storm being manageable, I stuck to my average estimated earnings power around $3.50 per share, as it was evident that this time was not different, as the business remains cyclical after all, despite all the buzzwords and latest technological developments. Note that this was ahead of the time at which AI was as prominent in the news as today.

Given the situation, I concluded to not yet become a buyer, unless shares would fall to the forties, levels which shares have not seen in 2023.

A Small Recovery

Since the end of 2022, shares have gradually recovered a bit and have traded in the $55-$75 range ever since, now trading at $63 per share. This is driven by a recovery in technology stocks at large, despite higher interest rates, driven by the enthusiasm around artificial intelligence.

In March, the company posted second quarter sales which were soft, with sales of $3.69 billion falling short of the guidance at $3.8 billion. The degree of the shortfall in the business was shocking with the company posting negative gross profits of $1.2 billion, as another $1.1 billion in operating expenses yielded a GAAP loss of $2.3 billion, with adjusted losses reported at $2.1 billion. These losses, a modest dividend, and net capital spending made that a modest net cash position was depleted.

The company guided for third quarter sales to come in flattish at $3.7 billion, although gross margins are expected to improve to negative 10% (at the midpoint of the guidance) with operating expense seen at $1.07 billion. In June, Micron posted third quarter sales at $3.75 billion which was slightly ahead of the guidance. The same cannot be said for the bottom line, with gross profits (or better said losses) reported at $668 million and operating expenses coming in slightly higher at $1.09 billion. This yielded a GAAP loss of $1.9 billion and adjusted loss of $1.6 billion.

Further sequential improvements are seen for the fourth quarter, with revenues seen at a midpoint of $3.90 billion. Gross margins are seen negative, equal to 5% of sales, with operating expenses set to fall to a midpoint of $946 million. Current losses and investments make that the company now has taken on a net debt load of $2 billion. Micron still has a large cash balance, as in fact the company reported $8 million net interest income for the quarter.

And Now?

The reality is that the last couple of quarters were dismal from a revenue perspective, and certainly the developments on the bottom line. Perhaps the biggest shock is the observation of at least three quarters of negative gross profits, considering that operating expenses trend around a billion a quarter.

While the worst seems to be a thing of the past, there still is quite some work to do before Micron becomes profitable again, as the company will incur some added net debt in the meantime.

The company is not alone facing issues as the wider technology landscape is one of divergence. While some firms like NVIDIA ( NVDA ) are thriving, others like Intel ( INTC ) and evidently Micron are hurt in this environment. Differences in the competitive positioning and geopolitical realities create real winners and losers in today's environment.

Given all of this, I am not necessarily turning more upbeat. Share are up 20% since the start of the year as the quarterly performance has been softer than anticipated. While the long-term demand drivers remains intact, and timing in cyclical end markets is notoriously difficult, I see no reasons to get involved here.

For further details see: