Why Micron's Stock is Soaring Despite a 50% Drop in Sales

After Micron MU +6.70% Technology posted a second-quarter earnings report for its fiscal second quarter that was nearly in line with expectations, Micron stocks were higher after the memory chip maker posted business results that were slightly below expectations, as PC and smartphone sales continued to suffer from a weak market environment. Additionally, Micron said that as part of its cost-cutting plans, it would reduce its workforce by about 15%, a higher reduction than previously planned, from a previous 10% reduction.

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In spite of this, memory chip maker Micron is showing some positive signs of growth.

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In an interview with Trade Algo, Sumit Sadana, Micron's vice president of global sales in charge of business operations, noted that the company is showing signs of improvement in terms of its high customer inventories, which have been adversely impacting its results over the past year. As far as inventory reductions at PC vendors are concerned, he says there has been "a lot of progress" as far as inventories held by smartphone manufacturers are concerned.

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A data center computing company's manager says that while there are still some woods to chop on inventories at that company, by the end of the calendar year, inventory conditions at that company should be more positive. "It was a challenging quarter, but we are seeing good, positive signs for the future," Dr. Matticoli said.

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On Wednesday, Micron shares were up 5.8% to $62.71, with the stock closing at $60.85 a share.

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A report from Micron (ticker: MU) says that the company's revenue for the quarter fell 53% from the same period a year ago, and 10% from the same period in the prior year. The company's revenue to date is about in line with estimates from Wall Street, at $3.7 billion. 

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It has taken a $1.34 billion inventory write-down in the quarter, which is equivalent to $1.34 per share, and brought Micron's adjusted loss in the quarter down to $1.91 from $1.91 in the prior quarter. The company's forecast for a loss of 62 cents was worse than the Street consensus forecast of 86 cents.

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The company has been deemed to have lost $2.12 a share under generally accepted accounting principles. The company lost $1.81 billion based on its adjusted Ebitda, or earnings before interest, taxes, depreciation, and amortization when compared to its reported Ebitda. The cash and marketable securities held by Micron at the end of the third quarter were $12.1 billion.

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It is worth noting that the company struck a positive tone in both its press release and the preparation of its conference call remarks in spite of the more than disappointing results.

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As a result of a challenging market environment, Micron CEO Sanjay Mehrotra said the company delivered revenue within its guidance range for the second quarter of the fiscal year. “Inventories of customers are improving, and we anticipate a gradual improvement in the supply-demand balance in the industry. To preserve our technology and product portfolio competitiveness, we remain confident in long-term demand."

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Mehrotra noted in remarks prepared for the company's earnings call that memory and storage are facing a difficult environment and a disastrous downturn in prices.

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Nevertheless, he does believe that inventory days outstanding have reached a peak, and the company is on the verge of returning to sequenced revenue growth, and that momentum should continue going forward. 

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This is the same as the Street's estimate of Micron's revenue for the third quarter of fiscal 2018, which is $3.7 billion, plus or minus $200 million. According to non-GAAP gross margin projections, the company has a non-GAAP gross margin of -21%, with a loss of $1.58 per share adjusted for inflation, or a loss of $1.79 per share if GAAPs are used.

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During his comments, Mehrotra asserted that Micron believed that its addressable market would rise by a significant margin in calendar 2025 and that this would be partly attributed to the massive memory requirements needed for the AI software, which is required to run large language models. As he pointed out, the widespread deployment of these artificial intelligence technologies is in its early stages and is likely to increase exponentially in their commercial applications.

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As the Micron CEO stated, he believes that data center revenue bottomed out in the most recent quarter. According to Micron, PC unit volumes will decrease by about a mid-single-digit percentage by 2023, when they would reach levels last seen before the outbreak of Covid-19. According to the company's previous forecast, PC units are expected to fall by approximately 10% this year.

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In calendar 2023, Qualcomm expects smartphone unit volumes to fall slightly at the end of the year; its previous guidance had predicted a flat or slight increase in volumes.

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In its latest quarter, Micron reported a 5% growth in revenue from its auto segment compared to a year ago, but noted that demand for its industrial products "continued to lag."

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As part of its long-term forecast, Micron anticipates a sequential bit demand growth rate for DRAM of about 5% and a NAND bit demand growth rate of about ten percent. This is far below its forecast of ten percent for DRAM and twenty percent for NAND. During the calendar year, the company expects sequential bit demand to grow for DRAM and NAND as customer inventories improve, and the reopening of China will also make for a positive effect on the year 2023 bit demand.

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The company forecasts that it will spend $7 billion on capital in fiscal 2023, a 40% reduction from last year's capital expenditure; this compares to a forecast range of $7 billion to $7.5 billion last quarter. It is expected that the company will continue to cut the number of wafer fabrication equipment sent in 2024 by a further 20%. The company also reported that it is planning to cut the headcount by 15%, a wider reduction than it had previously anticipated.