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Micron: The Good, The Bad, and The Ugly

Micron (NASDAQ: MU) is a cheap stock. And that single reason draws many investors (myself included) to the company. It has a trailing price-to-earnings (PE) ratio of around 7, much lower than the PE ratios of semiconductor companies like NVIDIA (39 times) or AMD (27 times).

But before we rush out and load up on Micron’s stock, investors should know different aspects of the company, including the good, the bad, and the ugly.

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The good: Micron just delivered a record quarter

Micron has been executing well lately. After delivering a 29% topline growth and a more than 100% increase in net profit in fiscal 2021, it entered the first half of fiscal 2022 with an even better set of numbers: revenue rose 29 % year-over-year to $15.5 billion, and net profit more than tripled to $4.6 billion.

The strong momentum continued in the latest quarter (fiscal 2022 third quarter) as revenue hit a record high of $8.6 billion, up 16% year-over-year. Net profit also improved 51% to $2.6 billion. Solid growth across data centers, graphics, and auto & industrial segments drove top and bottom lines improvements.

Operationally, Micron maintained its leadership in implementing and ramping up industry-leading memory and storage products (1-alpha DRAM and 176-layer NAND). It expects its latest products — 1-beta memory and 232-layer NAND) to begin production by this calendar year.

All in all, Micron delivered an outstanding quarter with solid growth across most metrics. Besides, it has positioned itself well (technology-wise) to ride the long-term tailwinds such as artificial intelligence, 5G networks, autonomous vehicle, and more.

Investors should expect growth to sustain over the long term.

The bad: The next few quarters would be challenging

Micron’s long-term prospects look good, but we cannot say the same for the near term.

Multiple headwinds could impact the memory and storage industry in the coming quarters, which include the supply chain and inflationary pressures, consumer demand weakness, and Ukraine War, to mention a few.

Micron expects these challenges to impact consumer demand for products such as PC and mobile. The company expects cloud, networking, and automotive segments to hold better on a slightly positive note. In line with these new developments, Micron guided fiscal 2022 Q4 revenue of around $7.2 billion (down around 16% sequentially).

These weaknesses prompt Micron to reduce its capital expenditure plan for fiscal 2023. While it’s positive that the management team is proactively adjusting its business to the external situation, their action suggests that the current downturn is unlikely to be short (one to two quarters).

Investors will need to brace for a challenging period in the coming quarters.

The ugly: The age-old problem of oversupply

The memory and storage industry has been a notoriously difficult industry to invest in. Historically, boom periods led to capacity addition that exceeded existing demand. But when the favorable tide turned — and the expected demand failed to materialize –, companies lowered product prices to recoup the vast capital investment and pay for the fixed cost needed to run fabrication facilities.

Over time, as the memory industry consolidates, we are left with just three major players: Samsung, SK Hynix, and Micron. There are signs the remaining players are behaving more rationally in adding new capacity, evident by the improving industry gross margins (up from 20% in the previous cycle to 40% in the latest cycle.

Micron, for its part, has reiterated (in its latest-quarter earnings) its promise to keep supply growth in line with demand. The tech company aims to maintain pricing discipline and manage capacity utilization to protect its bottom line. It went further with a plan to reduce CAPEX for fiscal 2023 (discussed above) to maintain supply discipline.

Despite these positive developments, there is no guarantee that the industry will remain disciplined over the longer term. After all, there is nothing to stop these companies from initiating a price war for their own short-term interest. And it takes only one company to act irrationally to push the industry back to its old patterns.

Investors should, therefore, keep a close eye on any early signs of price wars within the industry. A significant fall in Micron’s revenue and margins in the coming quarters are some red flags to catch.

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Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.