Memory chips maker Micron (NYSE:MU) reported Q1 FY2024 results topping analysts' expectations, with revenue up 15.7% year on year to $4.73 billion. Guidance for next quarter's revenue was also optimistic at $5.3 billion at the midpoint, 4.9% above analysts' estimates. It made a non-GAAP loss of $0.95 per share, down from its loss of $0.04 per share in the same quarter last year.
Key Takeaways from Micron Technology's Q1 Results
Revenue and EPS beat. Revenue guidance for next quarter was comfortably ahead of expectations. Lastly, inventory levels shrunk and CEO commentary in the release was optimistic. “We expect our business fundamentals to improve throughout 2024, with record industry TAM projected for calendar 2025. Our industry-leading High Bandwidth Memory for data center AI applications illustrates the strength of our technology and product roadmaps, and we are well positioned to capitalize on the immense opportunities artificial intelligence is fueling across end markets.” Zooming out, this was a solid quarter. The stock is up 3.8% after reporting and currently trades at $81.68 per share.
Micron Technology (MU) Q1 FY2024 Highlights:
- Market Capitalization: $90.69 billion
- Revenue: $4.73 billion vs analyst estimates of $4.63 billion (2% beat)
- EPS (non-GAAP): -$0.95 vs analyst estimates of -$1.01
- Revenue Guidance for Q2 2024 is $5.3 billion at the midpoint, above analyst estimates of $5.05 billion
- Free Cash Flow was -$333 million compared to -$758 million in the previous quarter
- Inventory Days Outstanding: 158, down from 172 in the previous quarter
- Gross Margin (GAAP): -0.7%, down from 21.9% 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 1.8% on average per year. As you can see below, this was a weaker quarter for the company, with revenue growing from $4.09 billion in the same quarter last year to $4.73 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).
Micron Technology had a decent quarter as its revenue grew 15.7% year on year, topping analysts' estimates by 2%. Micron Technology's growth flipped from negative to positive this quarter, news that will likely be well-received by shareholders.
Although Micron Technology returned to positive revenue growth this quarter, its management team expects revenue to decline 30.3% next quarter. On the other hand, Wall Street expects the favorable trend to continue, projecting 53.3% revenue 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 158, which is 22 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what 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 -0.7% in Q1, down 22.6 percentage points year on year.
Micron Technology's gross margins have been trending down over the last 12 months, averaging -15.5%. 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 negative 20.2% in Q1, down 18.6 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 negative 37.1%. 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 133% 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 negative $333 million in Q1, up 78.2% 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.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Micron Technology's subpar returns on capital over the last five years may signal a need for future capital raising or borrowing to fund growth. Its five-year average ROIC was 7.8%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+ returns.
Balance Sheet Health
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, the risk we care most about is the permanent loss of capital (not short-term stock price volatility), which can happen when a company goes bankrupt or raises capital from a disadvantaged position.
Despite having negative EBITDA (aka profits) over the last year and more debt ($14.11 billion) than cash ($9.05 billion) on its balance sheet, Micron Technology is in a decent financial position that will allow it to continue operating. We will, however, keep a close eye on the company as a few more quarters of negative profits will put the company into sketchy territory.
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.
Given its price-to-earnings ratio based on the next 12 months of 82.6x, Micron Technology is priced with expectations for long-term growth, and there's no doubt it's a bit of a market darling, at least for some. 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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