Even With Promising AI Hopes, Micron Has A Lot Of Work To Do

Semiconductor stocks are the talk of the town, largely due to the AI hype that is revolving around the top 25 stocks of the S&P 500 and its trailing SPDR S&P 500 ETF Trust SPY. With 503 holdings, the SPDR index is very top-heavy at the moment with the "S&P 7" riding the AI momentum: Apple AAPL, Microsoft MSFT, Amazon.com Inc AMZN, Alphabet GOOG, Meta Platforms META, Tesla Inc TSLA and AI chip leader, NVIDIA Corporation NVDA, which together make up more than 27% of the index.

But, Micron Technology Inc MU is making big promises of catching up on this front even to Nvidia who is running the AI chip show. Last Wednesday, Micron topped estimated with its third quarter results on the back of stronger-than-expected demand for its memory chips. Upon the report, Micron shares rose more than 2% in trading after the bell.

Micron’s Third Quarter Results 

Fueled by the AI hype and easing supply glut in PC and smartphone markets, Micron succeeded to top estimates across the board for its quarter that ended on June 1st. Micron brought in revenue of $3.75 billion, topping estimates of $3.65 billion. Micron still made an adjusted net loss of $1.43 per share but it was narrower than Refinitiv’s estimateof $1.58 per share loss. However, the bigger picture is far less bright as revenue tanked 57% YoY with a negative gross margin of 17.8% due to inventory write-downs that were imposed by plunging selling prices. With the $401 million write-down, the total for the first nine months of fiscal 2023 now adds up to $1.83 billion Adjusted free cash flow was a loss of $1.36 billion.

Owed to hopes of Micron-made chips being used to power generative AI, Micron shares gained 34% year to date. Micron also guided for a small sequential increase in full fiscal year revenue. Fourth-quarter revenue has been guided at $3.9 billion plus or minus $200 million, which was in line with Refinitiv’s estimate. Gross margin is expected to remain negative during the undergoing quarter, as well as the free cash flow.

The China Conundrum

With the ongoing U.S. versus China technology spat, Micron’s products were failed last month by China’s cyberspace regulators in a security review. The biggest U.S. chipmaker has confirmed last Wednesday the concerns of the Chinese government whose representative contacted its customers regarding the future use of its products, putting up to half of Micron’s revenue from China at risk due to the CAC decision.  China makes about one-quarter of Micron's total revenue so any drop from this region is the last thing Micron needs right now.

Big Promises Ahead

Micron revealed it will be introducing its first GDDR7 new-generation memory chips in the first half of next year. With higher performance compared to GDDR6 and GDDR6X, this new type of memory uses a different encoding and therefore, new memory controllers and consequently, GPUs. But Nvidia, along with AMD and Intel will be also introducing their next generation GPUs next year or early in 2025. Micron also pointed to several AI-related products, as well as its own HBM3 "plus" that is also coming next year. Therefore, Micron promises that it will do much more than just catch up with Nvidia and others.

Navigating Through One Of The Worst-ever Downturns

With the market expected to remain weak into next year and the China conundrum only slowing down Micron’s potential recovery, the chipmaker is making quarter-over-quarter improvements that is expected to continue in the undergoing quarter, while topping estimates for the latest reported quarter. The market for memory chips is expected to remain weak into 2024 and AI servers are still not powerful enough to bring Micron back to profitability. However, Micron says big game-changing products are coming. . Although the demand for PCs, smartphones, and servers is expected to remain mixed in the second half of the year, there seem to be signals of demand stabilization on this front as Micron believes that the bottom has been reached. Generative AI has a lot of hope with Micron expecting its addressable market to reach record levels in calendar year 2025 mostly due to booming demand for AI that is expected by all three major memory players, including Nvidia who led the charge of the S&P 500 with the gain of 180% year-to-date. All in all, it is still possible for Micron to make a turnaround—but probably not before the end of 2024 or by early 2025.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.