‘Doom, death and destruction’ in memory chips await Micron earnings — and that’s the analyst reiterating his buy

Micron Technology Inc. shares have fallen 45% this year, but the memory-chip specialist is not out of the woods yet, as demand for its core product continues to be weak.

A doomsday scenario may just be what the stock needs, one analyst said.

Micron MU,
+1.34%
is scheduled to report fiscal first-quarter earnings after the close of markets on Wednesday. Analysts expect that this year’s unprecedented soft demand for memory chips will drift into 2023 and create another tough year for Micron, making any forecast proffered by executives a key part of the coming report.

Micron executives guided for a first-quarter loss of 6 cents to earnings of 14 cents a share on an adjusted basis and revenue of $4 billion to $4.5 billion in their last earnings report, widely missing expectations. Analysts had been projecting adjusted earnings of 69 cents a share on revenue of $5.71 billion.

For more: Micron earnings suggest the chip downturn could be worse than Wall Street expects

The Boise, Idaho-based chip maker specializes in DRAM and NAND memory chips. DRAM, or dynamic random access memory, is the type of memory commonly used in PCs and servers, while NAND chips are the flash memory chips used in smaller devices like smartphones and USB drives.

For most of the year, analysts have been fretting about the chip sector, which hit record-high stock prices early in 2022 amid record sales and sold-out supply. That dynamic has flipped in the later part of the year, with analysts saying the sudden supply glut was worse than the one that occurred in 2019 after Micron executives detailed an “unprecedented” market downcycle.

While some analysts are starting to think the chip sector has already hit or will hit bottom with a “soft landing” sometime in 2023, BofA Securities analyst Vivek Arya thinks the memory-chip sector is heading for a “hard landing” in DRAM through early 2023.

“We note DRAM down-cycles have historically lasted about 3 quarters on average, and we anticipate this downturn to be no different,” Arya said, estimating a modest recovery into the back half of the year. Arya has a neutral rating on Micron.

“On the supply side, Samsung’s 005930,
-1.02%
decision to maintain flat capex [year over year] next year does not help, although their commitment remains to be seen,” Arya said. “[SK] Hynix 000660,
-0.38%
and Micron have committed to a more than -50% reduction in 2023 capex, which should help provide some pricing rebound in the back half of the year.”

One analyst, however, sees that as forcing a bottom in the first quarter of 2023. In a note titled “Doom, Death and Destruction But 50% of DRAM Market Hitting E-Brake, Should Bottom in 1Q23,” Citi Research analyst Christopher Danley reiterated his buy and $75 price target on Micron.

Danley was upfront: The print was going to be ugly, with an even worse guide. What is important going into this rotten scenario, he said, is that “what matters to the stock is the bottom is here.”

What to expect

Earnings: Of the 32 analysts surveyed by FactSet, Micron on average is expected to post an adjusted loss of 2 cents a share, down from the estimate of 95 cents a share in net income expected at the beginning of the quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for adjusted earnings of 5 cents a share.

Revenue: Wall Street expects revenue of $4.13 billion from Micron, according to 29 analysts polled by FactSet. That’s down from analysts’ $6.22 billion consensus forecast at the beginning of the quarter. Estimize expects revenue of $4.21 billion.

Analysts, on average, expect DRAM sales of $3.11 billion and NAND sales of $1.05 billion, according to FactSet.

Stock movement: Over Micron’s November-ending quarter, the stock ticked up 2%, while the PHLX Semiconductor Index SOX,
+2.35%
rose 5.6% and the S&P 500 SPX,
+1.57%
rose 2.8% over the same period, compared with a 2.9% decrease on the tech-heavy Nasdaq COMP,
+3.66%.

The previous quarter, which ended in August, was the second period in a row that Micron’s revenue fell short of analysts’ expectations, following a run of beats that went back to December 2018, when sales were about 1% lower than the Wall Street consensus . Over the 15 quarters since, the stock’s movement has been split, rising eight times the day after earnings and falling seven times.

What analysts are saying

Cowen analyst Krish Sankar, who has an outperform rating on Micron, said that demand for calendar 2023 is weaker than management had expected in September, that PCs are expected to decline into the mid-single digits and that end demand continues to be weak.

“We are updating our Micron model into earnings, reflecting our expectation for November [quarter] results to track towards the low-end of guidance, followed by another guide-down which may be more material than some investors are appreciating,” Sankar said. “The Memory industry continues to grapple with an ‘unprecedented’ market correction [the first half of calendar year 2023], and pricing trends have further deteriorated vs. Micron’s vision when it guided in late September.”

Evercore ISI analyst CJ Muse, who has an outperform rating, said Micron is clearly not out of the woods yet.

“We expect a ~low-mid teens% underutilization charge impact to GMs in May [quarter] 2023 associated with these actions,” Muse said. “We also think some degree of underutilization charge headwinds could linger into August [quarter] as the anticipated timeline for supply/demand rationalization continues to stretch, particularly given indications of a more aggressive Samsung, which is investing countercyclically in NAND and potentially DRAM into 2023.”

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