Micron (NYSE: MU) stock is trading sharply lower in US pre-market price action today. The company released its earnings for the fiscal third quarter of 2022 yesterday after the close of markets. While its earnings topped estimates, the guidance underwhelmed.
Micron posted revenues of $8.64 billion in the quarter that ended in May, which was higher than the $7.42 billion that it had posted in the corresponding quarter last year. Its adjusted EPS also rose from $2.59 to $2.63 over the period. Micron posted strong operating free cash flows of $3.84 billion in the quarter as compared to $3.56 billion in the third quarter of its fiscal year 2021.
The company posted record revenues in the quarter but the results failed to cheer markets as is evident in the price action. Notably, while Micron posted better than expected earnings in the quarter, it sounded bearish on its near-term forecast. Sanjay Mehrotra, Micron’s CEO said in his prepared remarks, “Recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth in fiscal 2023.”
In the fiscal fourth quarter, Micron now expects to post revenues of $7.2 billion at the mid-point. It has forecast an adjusted EPS of $1.63. Both metrics are below what the company posted in the fiscal third quarter. It also projected adjusted gross margins of 42.5% in the fourth quarter.
Micron’s Commentary on Outlook Spooks, Stock Falls
Micron now expects smartphone volumes to fall 5% in 2022 while analysts were expecting volumes to rise 5%. The company also said that PC sales might plummet 10% in the year and also warned PC makers would “adjust” their inventory levels in the back half of the year.
Notably, the PC and smartphone market has seen a reversal in fortunes. Industry players maintained over the last two years that they were supply-constrained and could sell only as many gadgets as they could produce.
Even before Micron’s earnings, markets were fearing that chip demand could taper down in the coming months. Not only is the demand coming down but companies have bought a lot of chips in advance amid the global chip shortage and rising prices.
During the earnings call, Mehrotra said, “Near the end of [the quarter] we saw a significant reduction in industry bit demand, primarily attributable to end demand weakness in consumer markets, including PC and smartphone.” He added, “These consumer markets have been impacted by the weakness in consumer spending in China, the Russia-Ukraine war, and rising inflation around the world.”
Notably, China’s slowdown has taken a toll on several companies. Even Nike sounded cautious about its sales outlook in China during its earnings call. Like Micron, Nike stock also plunged after the earnings.
While tech stocks are underperforming, defensive stocks have done well in 2022 and are outperforming. Pfizer stock has also fallen less than the wider markets. The company has applied with the FDA for full approval for its anti-COVID pill Paxlovid.
Warren Buffett Has Bought More Apple Stock in 2022
Meanwhile, Micron’s commentary on PC and smartphone sales outlook has set alarm bells ringing. The company supplies several industry giants including Apple. So far, Apple’s sales have held up well and have been constrained by supply, rather than demand.
If the global smartphone and PC market sees the kind of contraction that Micron is predicting, it would also mean trouble for companies like Apple. Apple also crashed in the year but Warren Buffett bought the dip in Apple stock. Apple stock is the largest holding for Berkshire Hathaway and Buffett has gradually built the stake to become the second-largest Apple stockholder.
Coming back to Micron, the stock is drifting towards its 52-week lows on the alarming guidance. Some analysts are also concerned over the long-term oversupply in the chip industry considering the billions of dollars of investments that chipmakers have announced. Micron has also announced $150 billion investments stretched over the next decade to build new plants across the world, including in the US.
Mehrotra meanwhile sounded to allay concerns over the long-term demand story. He said, “We are confident about the long-term secular demand for memory and storage and are well positioned to deliver strong cross-cycle financial performance.” However, for now, markets don’t seem to be buying the long-term growth story and is punishing Micron stock after the tepid guidance.
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