MU - Micron's Guidance Shocker

2023-09-27 17:10:16 ET

Summary

• Micron Technology, Inc. reported mixed earnings, beating revenue expectations but still experiencing losses.
• The company expects a recovery in 2024, driven by increasing demand and disciplined supply.
• Despite ongoing losses, Micron is emerging from the downturn and may present a buying opportunity once the market correction is over.
• But the margins outlook gives us pause.

The semiconductor sector has been demolished lately. One popular ticker among our traders and members is Micron Technology, Inc. ( MU ). Unfortunately, earnings in 2023 were losses, but it is about where things are going. However, we cannot understand where we are going without knowing where we have been. Thus, we turn to the just-reported Micron fiscal Q4 earnings to get a sense of performance, and more importantly guidance. In this column, we discuss the key results and what we see as happening in the name and offer the perspective looking forward after the recent downturn in performance.

In the just- reported fiscal Q4 , the results were mixed. Revenues were expected to be around $4.0 billion while adjusted earnings per share were expected to be a loss of $1.18 per share. The company did beat these expectations with revenues that were $4.01 billion with adjusted earnings per share of a loss of $1.17. Obviously, big losses were expected, but the outlook and other metrics were mixed.

Actually, the outlook for margins was a shocker. In the release, Micron Technology President and CEO Sanjay Mehrotra stated:

"During fiscal 2023, amid a challenging environment for the memory and storage industry, Micron sustained technology leadership, launched a significant number of leading-edge products, and took decisive actions on supply and cost. Our 2023 performance positions us well as a market recovery takes shape in 2024, driven by increasing demand and disciplined supply. We look forward to record industry TAM revenue in 2025 as AI proliferates from the data center to the edge."

This commentary hits some high points. First, the environment for memory and storage was and remains challenging. However, they took on big actions on the supply and cost side of the equation. Management sees a recovery in 2024 on the back of controlling supply and seeing. But we have a new set of expectations looking ahead to 2024. The guidance was everything here:

Fiscal Q1 looks like it is going to be rough once again. Per this guidance, sales will be around $4.4 billion give or take $0.2 billion. Micron management now expects margins of negative 4.0% to negative 8.0% as reported. Still not great, but the adjusted margins are improving from the doldrums of 2023. Adjusted margins will be down 2% to down 6%. Where a lot of progress has been made in controlling those operating expenses. They will be about $0.9 billion adjusted, helping to cut into the projected losses. Still, fiscal 2024 will pick up right where 2023 left off, with losses. EPS losses are projected of a loss of $1.00 to $1.14. The outlook, however, shows ongoing improvement from where the company has been.

Operating expenses in Q2 were $1.04 billion as reported, but adjusted were $0.842 billion. So, the increase for fiscal Q1 is a touch of a surprise. Again CAPEX has been important, we were awaiting this. Net CAPEX was $1.01 billion for Q4, and $7.01 billion for the full year of 2023, which resulted in adjusted free cash flows of negative $758 million for Q4 2023 and negative $5.45 billion for the full year of 2023. Ouch. That said, Micron ended the year with cash, marketable investments, and restricted cash of $10.52 billion. What is most important to note is that the bleeding is slowing. While that may sound like a band-aid on a hemorrhage wound, but is actually quite positive. We believe the trough is in, and performance will continue to inflect higher. The stock is down 4% following this report, but we will see how it behaves in tomorrow's session.

When will it get better? Over at our service, we have been discussing a turn for the sector having already been underway. No one knows for sure, but we think the bottom is in for performance for the sector. While higher for longer rates, a weakening economy, and drama with China are headwinds, we see supply normalizing and demand perking up in 2024 and that is key for considering an investment in the stock. The margin outlook really did catch us by surprise. We were looking for breakeven if not positive.

The fact of the matter is that Micron is emerging from a downturn. The downturn has been palpable. But this has happened before, and the stock will likely struggle with the market and sector before ramping up next year. We think it can break out in late Q4.

Final thoughts

The Micron Technology quarter was mixed overall, but it's all about the outlook. The company is making a push into AI, but then it turns around and guides to negative gross margins for Q1, which was a surprise. So more losses are in store, but we do believe the company is emerging from the depths of the downturn. When to buy the stock? We think once this correction runs its course in the market, you want to come in and do some real buying of Micron Technology, Inc. stock. We are close, but not there yet.

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