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Micron’s weak results indicate Nvidia, AMD and Qualcomm are not out of the woods yet

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1 year ago

December 23, 2022

Struggling Micron Technology (MU) continues to see the supply and demand dynamic for its memory chips out of whack — not a shocking state of play, but still a notable one because we’re invested in other semiconductor stocks. Micron posted worse-than-expected fiscal first-quarter 2023 results this week and forecast a wider-than-anticipated per-share loss in its current quarter. Too much inventory was largely to blame for the weak profit guidance. The company, which employs 48,000 people, also said it would reduce its workforce by 10% next year and suspend bonuses. Management indicated on the post-earning conference call that it expects some inventory improvement soon, leading to revenue improvements in the second half of its fiscal year compared with the first. However, demand in the first quarter, which ended Dec. 1, was still worse than the three months prior. We closely follow what Micron says and does because our chip stocks — Nvidia (NVDA), Advanced Micro Devices (AMD) and Qualcomm (QCOM) — have exposure to the same end markets: PCs, smartphones, data centers and, to a certain extent, automotive. Ultimately, what we heard from Micron suggests the semiconductor industry is not out of the woods yet. Of course, markets are forward-looking, often projecting out at least six months. This means a company’s stock price tends to bottom before its fundamental business does. But based on what Micron had to say, we’re not expecting to see shares of Nvidia, AMD and Qualcomm take off yet. “Across nearly all of our end markets, revenues declined sequentially in fiscal Q1 due to weaker demand and a steep decline in pricing,” Micron CEO Sanjay Mehrotra said on the earnings call this week. “Shipment volumes were impacted by our customers’ inventory adjustments, the trajectory of their end demand and macroeconomic uncertainty.” Big picture All chipmakers are not created equal, as we’ve said before . This is important to keep in mind when analyzing Micron’s results and commentary in search of readthroughs to our investments. In other words, we want to see if we can glean anything from Micron that might help us anticipate any similar trends or challenges in our book. The biggest distinction is the type of chips that each company makes. Micron’s specialty is memory chips, which fall under two primary categories. The first is dynamic random access memory (DRAM), which stores data on a temporary basis. The second is NAND flash, which stores data long-term because it can operate without constant power. Nvidia, Qualcomm and AMD, by contrast, make processors that deliver computing power, along with graphics chips that render images. Those processors go into products that need memory capabilities, though. All three Club chip companies have relationships with Micron to various degrees. At a high level, when Micron is reporting weaker demand in PCs, that’s connected to the overall number of machines being sold. This has implications for every semiconductor component — some made by AMD and Nvidia, others by Micron — that work together to make the PC run. Going forward, we’ll highlight what Micron had to say about the key PC, smartphone and data center end markets. This exercise is all about trying to gain a better understanding of when the beleaguered semiconductor market might turn around. PCs The PC market got progressively worse in 2022 following Covid pandemic-fueled strength in 2020 and 2021. For calendar 2023, Micron projects the rate of sales decline to slow somewhat. Its outlook is not necessarily great, but at least the company is not betting on an acceleration of the decline. “We now forecast calendar 2022 units to decline in the high-teens percentage and expect 2023 PC unit volume to decline by low to mid-single-digits percentage to near 2019 levels,” Mehrotra said on the earnings call. The readthrough is most applicable to AMD and Nvidia because they have the most exposure to the PC market. While our investment thesis in those companies is primarily tied to the data center, the weakness in PCs to date has hurt them both. Micron’s PC forecast is in line with those from Intel (INTC) and other third-party estimates, Wells Fargo said in a note to clients. However, AMD CEO Lisa Su said on the company’s most recent earnings call, on Nov. 1, that it is modeling PC sales down 10% in 2023. If AMD is just trying to be conservative, that’s probably a smart call due to the uncertain economic outlook. Smartphones Sales of smartphones — an important market for Micron — also slumped in 2022. The company said Wednesday evening it expects unit volume to be down 10% year over year in calendar 2022, a steeper decline than the high single-digit percentage drop it forecast on its late September earnings call. This suggests sales worsened in the intervening weeks. Mehrotra said the company expects smartphone unit volume “to be flattish to slightly up year over year” in calendar 2023. A key assumption in that forecast is recovering demand in China as the world’s second-largest economy reopens from strict Covid rules. We think Micron’s overall smartphone outlook is a bit too optimistic. Nevertheless, a recovery in China smartphone sales would be welcome news for Qualcomm, which has suffered both supply and demand problems associated with China’s pandemic policies. Smartphones are Qualcomm’s biggest end market, even as the company works to boost its exposure in areas like automotive and the Internet of Things (IoT), a broad term that covers connected devices. Micron said it expects revenue in its smartphone unit to increase throughout the year, granted that is off a very low base of $655 million in its first quarter. It’s worth noting: Qualcomm’s latest smartphone platform — announced in November and known as Snapdragon 8 Gen 2 — uses Micron’s low-power mobile memory chip . Data center/cloud In general, data center chips have been relatively resilient compared with the weakness in consumer-focused areas like PCs and mobile phones. But as concerns mount about a potential recession, there’s been concerns that data center could be the next shoe to drop. Micron continues to feel the effects of inventory build-up in this segment. “In data center, we expect cloud demand for memory in 2023 to grow well below the historical trend due to the significant impact of inventory reductions at key customers,” Mehrotra said. As mentioned, our investment thesis in Nvidia and AMD rests largely on the long-term growth of their data center businesses. When both companies reported their most recent quarterly results , in November, their server segments were considered bright spots. On Micron’s call Wednesday, Mehrotra acknowledged concerns about the broader economy, saying companies are being more cautious around expenses and long-term deals. “That can impact some of the current environment for end demand in cloud,” he said. “But what I would like to point out is that digitization trends ultimately do remain positive. Cloud definitely helps drive that efficiency that businesses seek in an environment like this. We do absolutely expect that once we get past the current macroeconomic environment and macroeconomic weakening, longer-term trends for cloud will remain strong.” In the near term, though, Wells Fargo analysts believe investors should consider Micron’s comments on data center inventory being a bit higher than expected. “We think Micron’s commentary on the still needed inventory digestion phase in data center could be considered incrementally negative,” the firm wrote in a note to clients. (Jim Cramer’s Charitable Trust is long NVDA, A M D and QCOM . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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An Advanced Micro Devices computer chip.

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Source: CNBC

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