Micron earnings suggest chip downturn could be worse than Wall Street expects

“As we look to the future, macroeconomic uncertainty is high and visibility is low,” Micron Chief Financial Officer Mark Murphy told analysts on a conference call. He expects the company’s inventory to continue to rise from its high levels in the first half of fiscal 2023.

Micron’s report should strike fear into the chip industry and its investors – Micron reports earlier than other semiconductor companies due to its odd fiscal year, which ended September 1, so it may be a harbinger of what’s to come throughout the upcoming earnings season. After Micron executives essentially admitted three months ago that the pandemic-era chip party was over, other semiconductor companies such as Intel Corp. INTC,
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and Nvidia Corp. NVDA,
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disappointed investors with subsequent results.

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Micron’s data center business could be a similar doomsday this quarter. While a slowdown in PC and smartphone chips was expected due to falling sales after a huge boom during the pandemic, the data center was expected to hold its own due to the strength of cloud computing. Micron, however, disclosed that data center revenues were down sequentially and year-over-year, primarily due to lower average selling prices.

In addition, declines in PCs and smartphones were steeper than in the previous quarter.

Even though Wall Street had been warned by Micron that business was slowing, Thursday’s news was a startling admission that the downturn hit the company faster than it had expected. Micron shares, however, followed the news quite well after an initial decline and actually ended after-hours trading in positive territory.

This is probably because Wall Street was somewhat prepared for a disappointing result from Micron. Wedbush Securities analyst Matt Bryson, for example, wrote in a note to clients on Monday: “When Micron initially guided FQ4, it appeared management was assuming a worst-case scenario. In retrospect, their guide probably didn’t turn out to be conservative enough.

Bryson warned in its note to customers that the data center remains a major concern going forward. “We are unclear to what extent this change is related to the constraints of the necessary components versus the weakening of the server requirements,” he wrote, adding that he foresees headwinds in the centers sector. of data.

Three months ago: The chip boom is over, as Micron says it’s in “recession”

Micron executives tried to put a positive spin on the future, noting that the company had a strong balance sheet and that it and the rest of the industry were taking “cautious steps” to manage supply growth. But they also pointed out that the pricing environment was becoming “aggressive” and that the profitability of the memory chip industry was going to be difficult in 2023.

Investors already knew the environment had changed for chip companies after the pandemic shortage turned into a glut, just as demand began to wane. And as in the last quarter, the question of the extent of the semiconductor downturn remains. Both the Micron report and outlook suggest it could still be much deeper than current forecasts.