There is no joy in Boise, tonight, the mighty Micron Technology Corp. (NYSE: MU | MU Price Prediction) has struck out. The memory chip maker reported fiscal third-quarter earnings after markets closed on Thursday. It posted better than expected earnings per share but missed the revenue estimate by less than 1%.
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And that was the good news. The less good news is that the current quarter is not expected to improve, and CEO Sanjay Mehrotra’s comment indicated that 2023 is unlikely to be any better. In the press release, Mehrotra said, “Recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth in fiscal 2023.” He also noted that Micron is “confident” regarding long-term demand for its products and the company is “well positioned to deliver strong cross-cycle financial performance.”
Analysts do not fully agree. One firm has downgraded the stock and four have cut their price targets. The stock posted a new 52-week low less than 30 minutes after Friday’s opening bell. The company posted its 52-week high in early January.
Analysts Vivek Arya and Blake Friedman at BofA Global Research cut the rating on the stock from Buy to Neutral and lowered the $70 price target on the shares to $62, a drop of 11.4%. At a share price of around $52.90, the upside potential to that target is 17.2%.
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BofA’s analysts note that fourth-quarter guidance is 21% below Wall Street estimates and 13% below sales in the same period last year. Micron’s guidance is the result of weak consumer demand for personal computers and smartphones, Chinese lockdowns and falling enterprise sales due to supply chain constraints for other components such as network cards.
Arya and Friedman also observed, “Valuation is low, and a large reset provides a near-term stock rebound potential, but fundamental growth recovery could be well into CY23 in our view.” Because Chinese sales accounted for half of the third-quarter sales miss, a recovery in China could help improve fourth-quarter results. Cloud data center spending also is expected to be strong into next year.
On the downside, weak third-quarter sales are exacerbating inventory levels, and that build-up “is expected to cause a multiquarter slowdown.” High inventory levels also contributed to gross margin guidance that was below expectations.
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Goldman Sachs analysts Toshiya Hari, Mark Coates and Francis Mejia left their Buy rating on Micron stock but cut their 12-month price target from $86 to $75, a reduction of 12.8%. Micron’s upside potential to the new target is 41.8%.
In their comments on the change, the analysts wrote:
Looking ahead, while we expect macro headwinds to drive a multi-quarter correction in pricing, margins, and FCF [free cash flow], and we once again reduce our below-consensus earnings estimates, on the positive side, we highlight management’s decision to cut capex and adjust fab utilization rates.
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Goldman’s analysts cited Micron’s intention to slow the production of older products and reduce spending on semiconductor manufacturing equipment. That comment has hit the semi equipment industry harder than the rest of the sector. Lam Research and ASML traded down more than 6% Friday morning, Taiwan Semiconductor traded down nearly that much and Applied Materials traded down by around 5.5%.
The analysts also noted that the company reiterated its commitment to return all its free cash flow to shareholders in dividends and buybacks and to exceed its 140% quarter-over-quarter increase in buybacks by a larger amount in the current quarter that ends in August.
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Downside risks include continued weak end-user demand for new PCs and smartphones, the enforceability of long-term customer purchase agreements and the analysts projected days of inventory rising from 109 days at the end of the third quarter to around 150 days at the end of the February quarter.
Deutsche Bank analyst Sidney Ho kept the bank’s Buy rating on the stock but slashed its $100 price target to $70, a cut of 30%. The upside potential to the bank’s new price target is 32.3%.
Ho agrees that weak demand from end-users is a major problem for Micron, and he was surprised by the size of the reduction in guidance. He believes that the shares are near a “cyclical trough” and the risk/reward calculation is upbeat.
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Analyst Harlan Sur at J.P. Morgan maintained the bank’s Buy rating but chopped its price target from $96 to $80, a cut of 16.7%. The upside potential based on the new price target is 51.2%.
Sur seconds Ho’s assessment that the shares are in a trough, but that the company has made the correct move by cutting capital spending, and he wrote that he would be accumulating the stock.
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