Memory chips maker Micron (NYSE:MU) reported Q4 FY2023 results exceeding Wall Street analysts' expectations, with revenue down 39.6% year on year to $4.01 billion. Guidance for next quarter's revenue was also optimistic at $4.4 billion at the midpoint, 4.49% above analysts' estimates. Turning to EPS, Micron Technology made a non-GAAP loss of $1.07 per share, down from its profit of $1.45 per share in the same quarter last year.
Micron Technology (MU) Q4 FY2023 Highlights:
- Revenue: $4.01 billion vs analyst estimates of $3.93 billion (2.15% beat)
- EPS (non-GAAP): -$1.07 vs analyst estimates of -$1.18 (beat)
- Revenue Guidance for Q1 2024 is $4.4 billion at the midpoint, above analyst estimates of $4.21 billion
- EPS (non-GAAP) Guidance for Q1 2024 is ($1.07) at the midpoint, below analyst estimates of ($0.92)
- Free Cash Flow was -$758 million compared to -$1.35 billion in the previous quarter
- Inventory Days Outstanding: 172, up from 170 in the previous quarter
- Gross Margin (GAAP): -10.8%, down from 39.5% in the same quarter last year
Founded in the basement of a Boise, Idaho dental office in 1978, Micron (NYSE:MU) is a leading provider of memory chips used in thousands of devices across mobile, data centers, industrial, consumer, and automotive markets.
Micron is one of the leading producers of both DRAM and NAND memory chips globally, though DRAM has consistently accounted for the majority of Micron’s revenues. Micron’s DRAM is mostly used in PCs, servers, networking gear, along with industrial and automotive verticals. NAND is used in the same end markets, along with a heavy weighting in consumer devices like smartphones and tablets.
Memory has the most volatile pricing dynamics in the semiconductors industry, which can result in Micron’s earnings results fluctuating wildly. As a result Micron’s valuation will often appear abnormally low compared to other semiconductors during the peak of the memory cycle, with the stock often trading for low to mid single digit forward earnings multiples (4x-8x) before dramatically expanding to high teens to mid twenties (18x-24x) when the cycle turns down.
Micron’s peers and competitors include Western Digital (NASDAQ:WDC), Seagate (NASDAQ:STX), SK Hynix (KOSI:000660), and Samsung (KOSI:005930).
The global memory chip market has become concentrated due to the highly commoditized nature of these semiconductors. Despite the market consolidation, DRAM and NAND are subject to wide pricing swings as supply and demand ebbs and flows. This plays itself out in the business models of memory producers, where the large, fixed cost bases required to produce memory chips in volume can become very profitable during times of rising prices due to high demand and tight supply but also can result in periods of low profitability when more supply is brought online or demand drops.
Micron Technology's revenue has been declining over the last three years, dropping by 2.13% on average per year. This quarter, its revenue declined from $6.64 billion in the same quarter last year to $4.01 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
Even though Micron Technology surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 39.6% year on year. This could mean that the current downcycle is deepening.
Micron Technology looks like it's on the cusp of a rebound, as it's guiding to 7.71% year-on-year revenue growth for the next quarter. Analysts seem to agree as consesus estimates call for 31.2% growth over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Micron Technology's DIO came in at 172, which is 38 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Micron Technology's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at -10.8% in Q4, down 50.3 percentage points year on year.
Micron Technology's gross margins have been trending down over the last 12 months, averaging -9.86%. This weakness isn't great as Micron Technology's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Micron Technology reported an operating margin of -30.1% in Q4, down 55.1 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Micron Technology's operating margins have been trending down over the last year, averaging -32.4%. This is a bad sign for Micron Technology, whose margins are already among the lowest for semiconductors. The company will have to improve its relatively inefficient operating model.
Earnings, Cash & Competitive Moat
Analysts covering Micron Technology expect earnings per share to grow 467% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Micron Technology's free cash flow came in at -$758 million in Q4, down 487% year on year.
As you can see above, Micron Technology failed to produce positive free cash flow over the last 12 months and shareholders will likely want to see an improvement in the coming quarters.
Over the last five years, Micron Technology has reported an average return on invested capital (ROIC) of just 10.4%. This suggests it struggled to find compelling reinvestment opportunities within the business.
Key Takeaways from Micron Technology's Q4 Results
Although Micron Technology, which has a market capitalization of $74.4 billion, has been burning cash over the last 12 months, its more than $9.59 billion in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
Revenue and non-GAAP EPS both beat analysts' expectations this quarter. We were also glad next quarter's revenue guidance came in higher than Wall Street's estimates. On the other hand, free cash flow missed. Non-GAAP EPS guidance for next quarter was below expectations, driven by a weaker-than-expected outlook for gross margins. On an absolute basis, Micron's margins are still falling year on year and in negative territory, which is illustrative of the "challenging environment for the memory and storage industry" called out by management. Zooming out, we think this was mixed quarter, with the outlook below revenue as a key negative. The market was likely expecting more, and the stock is down 1.1% after reporting, trading at $67.5 per share.
Is Now The Time?
When considering an investment in Micron Technology, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in the case of Micron Technology, we'll be cheering from the sidelines. Its revenue growth has been poor over the last three years, and analysts expect growth to deteriorate from here. On top of that, its operating margins reveal subpar cost controls compared to other semiconductor businesses and its gross margin indicate some combination of pricing pressures or rising production costs.
Micron Technology's price-to-earnings ratio based on the next 12 months is -69.9x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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