Micron Technology Remains A Show-Me Story (NASDAQ:MU)

Shares of Micron Technology (NASDAQ:MU) have fallen to fresh low territory after the quarterly results shocked investors, even as expectations were really low already.

My last take on the company goes back to October 2020, more than two years ago when I concluded that Micron was essentially a commodity player in a structural growth industry; I was not an active chaser of the shares.

By accident, shares of Micron traded at $50, the same levels as they do trade today, yet that was of course ahead of shares hitting the $100 mark in spring of 2021 and even the start of 2022.

Some Recap

Micron has been riding the wave of increased demand for its products due to strong growth as a result of secular trends which resulted in a former commodity business to become a structural growth play. This has not just resulted in booming earnings, yet investors believed that the longevity of those earnings had improved as well.

Around 2010, Micron was a business which generated around $8 billion in sales on which it posted break-even results, operating in a very competitive industry. The business boomed in 2014/2015, when sales doubled to $16 billion and earnings came in around $3 billion. Sales flat lined for a few years, rose to $30 billion in 2018 as operating profits rose to $15 billion that year (with profits even surpassing the revenues reported a couple of years before). Earnings power of more than $10 per share was not deemed to be sustainable as shares rallied to the $60 mark at the time.

After posting peak sales in 2018, revenues fell to $23 billion in 2019 and fell further to $21 billion in 2020. Operating earnings fell from $15 billion in 2018 to $7 billion in 2019 and to just $3 billion in 2020, as net earnings of $2.7 billion came in at $2.37 per share, while Micron operated with a net cash position of $2.6 billion.

Pegging the long term sales trend around $25 billion and margins around 20%, average earnings power through the cycle was pegged at $3.50 per share. With shares trading around the $50 per share mark and the company holding net cash to the tune of $2 per share, valuations looked reasonable at around 14 times average earnings, yet these were very volatile earnings. The bull-bear debate was active with bears believing that this remains a long term cyclical commodity play, while the bulls believe that megatrends would result in structural demand.

Given the situation of markets at large and net capital spending requirements pretty much eating all the prevailing earnings power, I saw no reason to get involved.

Boom-Bust

Following a tougher 2020, Micron has seen a recovery in the 2021 results, which was released in September 2021. Revenues rose from $21 billion and change to $27 billion. The company posted GAAP earnings of nearly $6 billion, equal to $5.14 per share with non-GAAP earnings coming in nearly a dollar per share higher. Momentum was a lot stronger already as fourth quarter revenues trended at $33 billion, with earnings trending closer to $11 billion, or $10 per share, and net cash stood at $3.6 billion.

Perhaps somewhat problematic as the company guided for first quarter sales to trend at just over $30 billion, with earnings trending around $8 per share, being an early indication that momentum had topped already.

Forwarding to September of this year, the company posted its 2022 results with revenues coming in near $31 billion, GAAP earnings of $8 billion and change working down to earnings of approximately $8 per share. The problem is that fourth quarter results fell $2 billion on an annual basis, trending at just $25 billion per annum. Moreover, earnings power had fallen to $5-6 per share already. Net cash rose slightly to $4.1 billion, equal to about $4 per share.

By now shares had fallen from $100 at the start of the year (equal to about 10-12 times peak earnings) to the fifties. This came as the company guided for first quarter sales around $4.25 billion, with the company set to post break-even results. Despite the worsening conditions, Micron announced a huge $15 billion expansion project in Boise, Idaho at the start of this fall.

In November, the company announced that it was cutting DRAM and NAND wafer starts by another 20% versus the fourth quarter of the fiscal year 2022, indicating continued troubles, hinting that the first quarter would be weak.

In December, it turned out that first quarter sales came in at $4.1 billion, a bit softer than already guided for. The company posted a GAAP loss of $195 million. Reduced earnings power resulted in net cash falling to $1.8 billion amidst some buybacks and net capital investments on top of the reported losses. Worrisome is that second quarter sales are seen down further to $3.80 billion, marking a $290 million reduction from the first quarter results.

Second quarter adjusted losses per share are seen up from $0.04 per share to $0.62 per share, indicating a more than $600 million headwind to earnings, increasing at twice the pace as the decline in sales, worrying signs. While net cash has come down a lot, the absolute cash position of some $12 billion is huge, providing great liquidity to Micron to ride out this wave.

What Now?

Right now, Micron is seeing real tough times, as the storm seems manageable, at least, so it seems. The question is what the real run rate of the business is, perhaps still seen around $25 billion through the cycle with 20% margins resulting in operating earnings power of around $5 billion. With tax rates low, as are net interest expenses, earnings power could likely exceed $4 billion in such a case, still equal to about $3.50 per share.

Hence, we are completely back to the situation which we were in around 2020 as shares traded around the same level at the time, net cash balances are fairly similar and earnings per share through the cycle are still seen around $3.50 per share, if you ask me. Right now we are still in the decline mode of the cyclicality as the company continues to resort to cost cuts, announcing a 10% reduction in the workforce.

The reality is that just like 2020, I am still not convinced this is yet the time to get in. Of course, shares have traded around the $100 mark in the intermediate period, yet this was driven by a huge bull market, as a reversal of recently seen earnings power is far from a given here. This remains a show me story, with further pullback to the lower forties needed before I might be enticed to alter this neutral stance.

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