Micron: Slower Recovery, But Nothing Far From A Buy
Contributor since 2021 / 2631 Followers
Summary:
- The memory chip industry’s supply limitation efforts are paying off, and the supply limitations are expected to continue at least through 2023.
- Demand environment recovery is expected to take place in the coming few quarters as demand recovery strengthens going into 2024.
- Political risks regarding China will likely have limited effects on Micron.
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Introduction
I published a bullish article on Micron Technology (NASDAQ:MU) in early April. At the time, I argued that Samsung’s (OTCPK:SSNLF) decision to cut supplies along with Micron and SK Hynix will allow the entire memory chip industry to accelerate supply and demand imbalance, which could accelerate the end of the industry downturn. For this reason, I had a buy rating. Today, I believe these reasons continue to stand in contributing to my bullish thesis. During the most recent earnings call, Micron’s management team said that “the significant supply reductions across the industry have started to stabilize the market,” and the “market recovery can accelerate if there is a further reduction in industry production and these cuts are sustained well into calendar 2024.” Thus, my previous reasons for a buy rating still stand.
I am reiterating my bullish views on Micron today as there have been more positive developments in the market since my previous article. Customer inventory has been sharply declining with an expectation for this trend to continue throughout 2023 and into 2024. Further, although slightly pushed back, memory chip demand recovery, in my opinion, is not a question of if but when, which is shown in the continued demand for cloud computing. I would also like to address fears regarding Micron’s business impacts in China, which I believe will not be significant. Overall, for these reasons, I continue to believe Micron is a buy.
Supply Limitations
In line with my previous expectations, customer inventory has been trending down, although they continue to be too high negatively affecting Micron. At the time of writing, the duration of the supply limitations from major memory chip makers, Samsung, Sk Hynix, and Micron, was not certain; however, I believe these cuts will last throughout 2023 and into 2024 further accelerating the return of more favorable market conditions for Micron and all the memory chip makers.
Samsung in late July announced that the company will be extending production cuts. Although the announcement did not come as a surprise, it was meaningful for the company to publicly announce such a decision. Unlike Micron and SK Hynix, Samsung was the last major memory chip producer to announce a production cut. The company did not give an exact date as to when the company will end the production cuts, Samsung said that it will continue in the second half signaling that the most bullish memory chip maker is thinking of ending supply cuts for a chicken game in the near future.
Micron, during the company’s earnings call, has also signaled that the supply limitations will not see an end in the near future by saying that the company expects “fiscal 2024 WFE to be down year-on-year” after 50% reduction in WFE in 2023 as the company understands that an aggressive supply cut will accelerate the return to a favorable market condition if the “industry production…cuts are sustained well into calendar 2024.” Finally, SK Hynix announced that the company will cut NAND flash output by an additional 5% to 10%.
Therefore, all three major memory chip producers have signaled that the supply limitations will at least continue throughout 2023, which shows that there will be no hiccups for the foreseeable future. The industry for this reason will likely become more favorable for memory chip makers creating a potential tailwind in 2024 as supply and demand imbalances ease.
Future Demand Prospects
Future demand prospects are not bright, at least in 2023. The recovery of consumer electronics and overall memory chip demand has not been as sharp as previously expected; however, I continue to see the demand recovering, albeit at a slower pace. As technological innovation continues, it is likely that the question of demand recovery is a question of when not if.
The memory chip is a vital component in today’s digital age. Consumer electronics demand is showing slow progress in its recovery roadmap, but IDC is expecting the demand to return in 2024, which is largely in line with numerous semiconductor companies. Analysts expect Micron, TSMC (TSM), Intel (INTC), and AMD’s (AMD) revenue to see accelerated growth in calendar 2024 after negative growth in calendar year 2023.
In addition to the future prospects of consumer electronics, data center demands are expected to see continual sequential growth. Looking at Micron’s 2023Q3 earnings report, the company said that they saw “strong sequential revenue growth in both cloud and enterprise in fiscal Q3 driven by some recovery.” The growth has largely been focused on AI servers due to a generative AI driving higher-than-expected industry demand, but the overall market demand is seeing signs of strength. Google (GOOG) Cloud saw 28% growth year-over-year showcasing the necessity of these services.
Overall, the world is becoming more digital. Generative AI is booming in many industries beyond tech, smarter hardware is producing more data than ever before, and cloud demand is seeing no signs of slowing. As such, the world is inevitably changing. It is simply in a temporary phase of slower growth due to the oversupply of chips during the pandemic and reduced hardware demand following the pandemic, but I believe it is evident that the demand recovery question is when not if. Finally, with an expectation for hardware demand to recover in 2024, the sequential growth and recovery of the overall demand will likely take place in the coming few quarters for Micron.
Risk to Thesis
Since my previous article, further risks to my bullish views has raised. China has banned Micron chips in key infrastructure over national security reasons creating a scenario where the country may expand the use of Micron chips as the term national security, so far, is vague. Micron, in its earnings call, has said that the “low double-digit percentage of Micron’s worldwide revenue is at risk of being impacted.”
This certainly poses massive risks and uncertainties to Micron’s operations as political decisions are often hard to predict. However, although there could be some minor impacts, I do not think that China will escalate the situation by imposing a widespread ban on Micron products.
There are three major memory chip producers in the world: Micron, SK Hynix, and Samsung. Micron has a headquarter in the US and SK Hynix and Samsung have theirs in South Korea, which is an ally of the United States. If China chooses to escalate the political situation further by imposing a strong ban on Micron, China will need to rely on the two Korean companies for memory chips. However, the US has already asked the South Korean government to not fill the gap if Micron is banned by China. It is uncertain if the South Korean government will follow through with the American government’s request, but if a future escalation does happen in the industry due to China banning Micron, Korea likely has one choice: choose between China and the US. As it is highly unlikely that Korea will choose China over the US in an escalated scenario, I do not believe that the current China risks are significant. Its minor risks will likely be dwarfed as the demand for the memory chip industry returns.
Summary
The bullish case for Micron has only strengthened since my last article on the company. Not only has the industry corroborated to limit the supply of memory chips, but also, all the major players in the industry have signaled for continued supply limitations at least throughout 2023 and likely into 2024, which is expected to accelerate the return of favorable market for Micron. Further, the demand recovery for consumer electronics and data centers continues to be volatile, but it is largely expected that these demands will return in 2024 or the coming few quarters. Therefore, even with the potential for a slight risk from China’s political policy, I continue to be bullish on Micron. Micron is a buy.
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of MU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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