Micron Weathers Memory Downturn

Micron Technology’s MU fiscal 2023 second-quarter results fell below our expectations due to $1.4 billion in inventory write-downs, reflecting the worst memory downturn in the last 13 years. Tepid demand and elevated inventory levels have damaged pricing. Although we remain positive on long-term memory demand growth from key trends such as artificial intelligence, 5G, electric/autonomous vehicles, and cloud computing, we now expect revenue to fall 50% in fiscal 2023 before rebounding in fiscal 2024 and thereafter. Micron is cutting its fiscal 2023 capital expenditure budget to $7 billion (versus $12 billion in fiscal 2022), lowering its headcount by 15%, and reducing its utilization and output. Quarterly operating expenses are expected to decline to below $850 million by the fourth quarter (from about $1 billion this quarter).

We are maintaining our $70 fair value estimate for the no-moat chipmaker, as our lower near-term estimates are offset by a stronger rebound in subsequent years. The shares trade at a discount to our fair value estimate, but we think prospective investors should prioritize more moatworthy chip stocks such as ASML and AMD.

Second-quarter sales fell 10% sequentially to $3.7 billion. DRAM sales were $2.7 billion, down 4% sequentially, with bit shipments increasing in the midteens and prices declining roughly 20%. NAND revenue fell 20% sequentially to $885 million, with bit shipments increasing at a mid- to high-single-digit percentage and prices decreasing by the mid-20s.

Gross margin fell to negative 32.7% from 21.9% last quarter, largely hit by the $1.4 billion of inventory write-downs in the second quarter and underutilization of Micron factories. We expect the bottom line to improve toward the second half.

Management expects third-quarter revenue to remain flat sequentially and gross margin to be negative 23% at the midpoint.