October 6, 2022

Micron Technology‘s (MU -0.19%) latest results for its fiscal third quarter, which were released on June 30, turned out to be a shocker as the company’s guidance was way behind expectations.

Micron’s earnings and revenue for the three months ending on June 2 increased nicely year over year, but its outlook was proof that its days of rapid growth are now in the rearview mirror. The memory specialist expects to earn $1.63 per share this quarter on revenue of $7.2 billion. Wall Street was looking for $2.60 per share in earnings on $9.15 billion in sales. Those numbers would have resulted in decent year-over-year growth as Micron had reported $2.42 per share in adjusted earnings on $8.27 billion in revenue in the year-ago period.

The guidance, however, turned out to be dismal and sent investors panicking. Let’s look closely at the reason why Micron’s guidance was woeful, as this is a red flag that potential investors should be aware of.

The red flag

Micron management’s comments on the latest earnings conference call make it clear that the chipmaker is in for a period of downturn thanks to weak memory demand from smartphones and personal computers (PCs). That’s because the mobile, PC, and consumer markets accounted for 55% of Micron’s total revenue in 2021, and these verticals are in for difficult times this year.

IDC estimates that PC shipments are on track to decline 8.2% in 2022. Smartphone sales, on the other hand, are expected to drop 3% this year. The weakness in these markets — driven by multiple headwinds such as weak consumer spending, the war in Ukraine, and rising inflation — is going to impact the demand for memory chips that Micron sells.

As a result, Micron has decided to streamline its inventory and capacity investments, so that memory prices don’t tumble. The bad news, however, is that memory prices are already trending lower at an alarming pace. According to market research firm TrendForce, the price of DRAM (dynamic random access memory) could drop approximately 10% in the third quarter of 2022 as compared to the second quarter. The firm was earlier anticipating a price drop of 3% to 8%.

As DRAM produced nearly three-fourths of Micron’s total revenue last quarter, the decline in DRAM prices poses a major challenge for the company and is a big red flag that investors shouldn’t ignore.

The green flag for Micron Technology

Micron’s near-term prospects are no doubt gloomy, but savvy investors should focus on the bigger picture during these difficult times. The biggest green flag for investing in Micron right now is the secular growth that the memory market is expected to clock in the long run.

Micron estimates that its total addressable opportunity in 2021 in the NAND flash storage and the DRAM markets was worth $161 billion. That addressable market is expected to hit $330 billion by the end of the decade. Micron is in a nice position to take advantage of this incremental revenue opportunity as it controlled nearly 23% of the DRAM market last year. Its share of the NAND flash memory market stood at just over 10% in the third quarter of 2021.

It is worth noting that Micron is trying to establish a technology advantage over its rivals by way of its product development moves that could help boost its market share in the future. The company claims that it is occupying the top position in the DDR5 DRAM space, which should help it take advantage of the data center market as this type of memory is expected to power next-generation servers.

Additionally, Micron believes that it holds the top position in the automotive memory market as well. This bodes well for the company as DRAM demand in automotive could clock annual growth of 40% through 2025, while NAND demand could increase at an annual pace of 49% over the same period.

So, it won’t be surprising to see Micron regain its mojo in the long run and turn out to be a top semiconductor bet once again. But investors will have to wait for a turnaround in the memory market’s dynamics for that to happen.

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