Computer memory chip magnate Micron Technology (MU) dropped a couple bombshells on the stock market on Tuesday.
But good news first: To maintain its leading position in the memory market, Micron will invest $40 billion in U.S. manufacturing plants through the end of this decade. Production won't be immediate (more on that in a bit), but it will be relatively quick for such a large effort, beginning "in the second half of the decade." The specifics of these plans are still being worked out, but Micron says it will be ready to "share additional details in the coming weeks."
And now the bad news: Speaking at a "fireside chat" (that was curiously held in the middle of summer) at the KeyBanc Technology Leadership Forum in Vail, Colorado this morning, Micron CFO Mark Murphy warned that "due to macroeconomic factors... supply chain constraints [and] customer inventory adjustments," Micron is seeing declining demand for its DRAM and NAND memory chips. It now expects to endure "a challenging market environment in FQ4 22 and FQ1 23."
What this means is that revenues in Micron's current fiscal Q4 2022 will probably miss analyst targets, coming in only at, or even below the $6.8 billion in revenue that Micron guided towards less than two months ago. Worse, Micron says its revenues will decline even more in Q1 2023, with profit margins falling as well.
Oh, and the company is going to flip from free cash flow positive to free cash flow negative in Q1 2023.
Responding to all the above, Raymond James analyst Melissa Fairbanks downgraded Micron stock from "strong buy" to merely "outperform" on Tuesday, and cut her price target 10% to $65 a share. Although over the long-term Fairbanks still believes that Micron "will benefit from significant secular trends," she sees limited upside to the stock in the near term. (To watch Fairbanks' track record, click here)
In addition to Micron's own warnings about Q4 2022 and Q1 2023, Fairbanks cites reports of slowdowns at other chipmakers, such as Nvidia, as supporting her thesis that "demand and supply constraints [will] persist into F2Q" 2023 as well. Indeed, Fairbanks is predicting that after declining from Q4 levels in Q1, sales will fall another 10% between Q1 and Q2. Adding earnings injury to sales insult, she further predicts that gross profit margins could plunge from north of 47% in fiscal Q3 2022, down into "the low- to mid-30s" before business starts improving again.
How bad will this be for Micron's bottom line? It's hardly a disaster, but after shooting up from $5.34 per share in fiscal 2021 to $8.37 per share in fiscal 2022, Fairbanks forecasts a steep reversal and a 24% decline to $6.35 per share in fiscal 2023. Granted, she also thinks that things will start improving towards the end of fiscal 2023, but for the next several quarters at least, things could look pretty grim for Micron. Hence the downgrade.
So, that's Raymond James' view, how does the rest of the Street see the next 12 months panning out for Micron? Based on 19 Buys, 4 Holds, and 2 Sells, the analyst consensus rates the stock a Moderate Buy. With a return potential of ~20%, the stock's consensus target price stands at $73.57. (See MU stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.