Micron Technology (MU) is a highly cyclical manufacturer which reports quarterly earnings one month early. The last quarter earnings were strong, but the next quarter guidance is revised downward by 15% at the revenue level. Infrastructure and industrial demands remain very strong with cloud demand still up 50% year on year. But demand from more mature markets like PC and cell phones is slowing down and impacting volumes and pricing.
This sent a shock wave in the semi-conductor sector's already depressed share prices. The situation is a bit quixotic: some parts of the market are slowing down but others like car makers are still suffering significantly from chip shortages. Significant new capacity additions are being delayed. TSMC is having hiring issues in the US for its new plant and its main existing Taiwan- based factories were hit by power shortages. Part of the weakness in PC and cell phones is due to the Chinese lockdowns and should therefore see a bit of a positive reversal in the coming weeks. Micron is taking a very conservative view on both markets particularly PCs where they expect a 10% yearly contraction.
The post-covid new balance is difficult to find and the lockdowns in China and war in Ukraine are not helping. We don’t know how many negative quarters we are heading into. Cloud demand could also roll over at some stage. On the other hand, demand from car manufacturers and industrials hit by ongoing shortages is set to remain very high.
The interesting point is that a lot of bad news is already priced in. In the case of Micron Technology, the shares trade on 6x earnings and 1.2 Price to Book which sounds undemanding for a profitable company with a 13% average revenue growth rate over the past 5 years and a 30% Net Profit Margin. Similarly, AMAT a leading and highly profitable semiconductor equipment manufacturer trades close to 10x earnings which is very close to a 10-year low.
Micron Technology is changing its business mix towards higher growth markets. Currently they have a revenue exposure to PC and handsets of 65% and 35% to Data Centers and industrials and planning to move to a mix of 58% Data Centers and industrials. They have made a heavy bet on graphic memory where they lead the industry. AI, metaverse and autonomous driving are new mega growth avenues for graphic computing and storage with increasing need of storage of huge 3D graphic data sets. Even though it is very delicate to call a bottom, we think that current cyclical headwinds are giving a chance to buy very interesting growth stocks at attractive valuation for long-term investors. Risk-adverse investors will want to wait another 4 weeks to get the full picture from other leading semi-conductor manufacturers.
(*) Deshima Smart Data has no position on Micron Technology on July 4th.
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