Micron Faces Revenue Decline, But Hope on the Horizon

Micron, a leading memory chip company, is set to release its fiscal fourth-quarter report, covering the period ending August 31. The projections paint a concerning picture, with an expected 41% revenue decline and a negative 10.5% gross margin. However, despite these disappointing figures, there is a glimmer of hope for the company as its stock has risen by an impressive 36% this year.

The divergence between the bleak forecast and the optimistic stock performance highlights Wall Street's belief that Micron's fortunes are about to take a turn for the better. For the August quarter, the company anticipates generating $3.9 billion in revenue while reporting a loss of $1.15 per share on an adjusted basis, or a loss of $1.33 per share under generally accepted accounting principles. Market estimates align closely with Micron's guidance, projecting revenue of $3.9 billion and losses of $1.19 per share on an adjusted basis, or $1.34 per share under GAAP.

The main challenge Micron has faced is weakened demand for its memory chips in key markets such as PCs, mobile phones, and data centers. Earlier projections suggested modest single-digit growth for dynamic random-access memory (DRAM) and high single-digit growth for NAND memory chips by 2023. However, demand for PCs, smartphones, and traditional servers has now softened, impacting Micron's outlook.

"While demand driven by artificial intelligence has exceeded our expectations from three months ago, the forecasts for PC, smartphone, and traditional server demand have been revised downwards," stated the company in its last quarterly report.

To address the weakened demand, Micron has implemented aggressive cost-cutting measures. The company's capital expenditure for fiscal year 2023 is projected to be $7 billion, representing a decrease of over 40% compared to the previous year. Additionally, spending on wafer fabrication equipment is expected to drop by more than 50%. Micron also indicated that it anticipates fiscal year 2024 wafer fab equipment spending to be lower than fiscal 2023 levels.

Despite the challenging circumstances, the market remains cautiously optimistic about Micron's future prospects. Investors are eagerly awaiting the release of the company's fiscal fourth-quarter report to see if these hopeful sentiments will be validated.

Micron's Revenue Expected to Improve in November Quarter

Investors are optimistic about Micron's turnaround as reflected in the stock price. For the November quarter, analysts predict a sequential revenue improvement to $4.2 billion, a 4% increase compared to the previous year. The non-GAAP loss is estimated to be $1.04 per share.

Potential for a Strong Quarter

Mehdi Hosseini, an analyst at Susquehanna Financial Group, anticipates a beat-and-raise quarter. He highlights that competitors Samsung and SK Hynix have recently reduced production of DRAM and NAND, which suggests a positive supply environment and favorable pricing conditions. Hosseini believes that the gross margin will reach its lowest point in the first quarter of the fiscal year 2024 and then gradually improve, leading to a modest operating profit in the third quarter. Hosseini rates Micron shares as Positive and sets a target price of $90.

Meeting Expectations with Positive Guidance

Srini Pajjuri, an analyst at Raymond James, expects the August quarter results to align with estimates, while providing slightly above-consensus guidance for the November quarter. Pajjuri notes that the production cuts earlier in the year have started to limit supply growth, while increased memory content in the Apple iPhone 15 Pro and a moderate recovery in China smartphones contribute to demand. Furthermore, an inventory correction in the PC and smartphone markets is almost complete, and data center memory inventories are expected to normalize by the year's end. Pajjuri maintains an Outperform rating on Micron.

Positive Market Indicators

Prior to the earnings report, Micron shares experienced mild gains, reaching $67.96.