Micron's outlook falls short of expected, but not capitulating

Micron Technology Inc. delivered an outlook that fell far short of the consensus view, prompting questions about how the memory market will fare in a downturn.

The company expects to see revenue of $6.8 billion to $7.6 billion in August, whereas analysts from FactSet had predicted $9.15 billion. Micron s chief executive acknowledged that the industry demand environment has weakened, pointing out pressures in the PC and smartphone markets.

Opinion: The chip boom is likely over, as Micron says it is in a downturn Shares MU were off nearly 6% in Friday morning trading.

While Micron called out PC and smartphone weaknesses, it is still not seeing demand issues in its datacenter business, according to Barclays analyst Tim O Malley.

Micron's outlook shortfall was more material than expected, but not capitulating on Data Center doesn't leave the coast clear yet, he wrote.

He said that the company is doing everything right on the supply side by reducing capital expenditures, slowing bit growth, and shipping from inventory. We think consumer markets are further weakening and there are already indications that slowing down the server market will lead to additional cuts. While the memory industry has always been able to emphasize profitability in past downturns, O Malley said that this cycle is likely to be more severe than previous cycles, leaving an important test and the stock likely to trade sideways until then. O Malley kept his overweight rating and $75 price target intact on the stock. Of the 36 analysts tracked by FactSet who cover Micron's stock, 31 have the equivalent of a buy rating, while three rate the stock at hold and two rate it at sell.

Bank of America s Vivek Arya was no longer one of the bullish analysts, as worries beyond consumer-facing end markets prompted him to downgrade Micron shares to neutral from buy.

PC phone 55% of sales demand weakness is due to elevated inventory levels, which is expected to cause a multi-quarter slowdown, he wrote. Yellow flags are emerging across cloud enterprise customers, which could potentially expand the length of inventory correction. Arya seemed more optimistic on datacenter trends, but he said that cloud data center spending remains strong, and DDR 5 is expected to ramp in the back half of 2022 and into next year. Muse thought Micron was ripping off the band aid with its outlook and saw positives in the company's approach to profits.

Micron plans to maintain pricing discipline and walk away from business with too-low pricing, he wrote. Micron is reducing its planned WFE wafer-fab equipment spend in FY 23 to reduce bit output, as well as plans to work down inventory in order to meet demand in CY 23, a move he expects to weigh on semiconductor-equipment names.

It is worth noting that Micron has a very new CFO chief financial officer, we have to believe there is some excess conservatism in the updated outlook, according to Muse, while reiterating his outperform rating and $90 longer-term price target. Raymond James analyst Melissa Fairbanks saw the demand challenges as generally expected given the bearish macro concerns and agreed that Micron seems to be taking the right steps.

She wrote that the decision to reduce bit output and cut capex for FY 23 sets the company up to better weather near-term turbulence executing toward the cross-cycle profitability targets, while it may take time for the overall market to respond to lower demand signals.

Fairbanks maintained her strong buy rating, but she reduced her price target to $72 from $115.

Micron's stock has slid 44% year to date, while the PHLX Semiconductor Index SOX has dropped 37.8% and the S&P 500 Index SPX has dropped 20.9%.