Micron Q3 2022 Earnings: Why Fear Was Warranted (NASDAQ:MU)

After the bell on Thursday, we received fiscal third quarter results from memory and storage solutions leader Micron Technology (NASDAQ:MU). In recent weeks, there was some fear about the DRAM and NAND market weakening. Unfortunately for investors, the company confirmed that things are in fact quite tough at this point, which sent shares to a new yearly low.

Just in the past few days, we received pretty bearish analyst notes from both Barclays and Citi. Both analysts were calling for the company to miss Q3 numbers and provide weak guidance. However, for the reported quarter, revenues were basically in-line with estimates, depending on which site you use, and non-GAAP earnings per share came in more than a dime ahead of the street. Total revenues were up 16.4% year over year while adjusted earnings soared from $1.88 to $2.59.

As Barclays pointed out, NAND spot pricing has fallen 8% over the past quarter, while DRAM is down 12%. Consumer markets have been weakening, as fears of a recession are definitely hurting in the US, and the Russia / Ukraine War isn’t helping in Europe. The only question analysts seemed to be asking would how weak guidance would be, and the answer turned out to be much worse than even the bears were looking for.

When looking at the current quarter, Micron anticipates fourth quarter revenue to be between $6.8 billion and $7.6 billion, with adjusted earnings per share to be between $1.43 and $1.83 per share. Analysts were expecting Micron to generate $9.05 billion in revenue and guide to adjusted earnings of $2.62 per share. The analyst at Citi for instance, who lowered his price target by $15 to $85 this week, was still more than a billion dollars above the company’s midpoint, despite already calling for a guidance miss. Here’s the key press release quote from Micron CEO Sanjay Mehrotra:

Recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth in fiscal 2023. We are confident about the long-term secular demand for memory and storage and are well positioned to deliver strong cross-cycle financial performance.

In the last month, the average street revenue estimate for Q4 had come down by about 5%, but that still implied about 10% growth over the prior year period. Now, Micron is actually guiding to a meaningful top line decline, which doesn’t set things up nicely as it finishes its corporate year. The analyst at Citi just this week had cut his revenue estimate for the August 2023 year from $40 billion to $33.5 billion. That number looks a lot more realistic now given Micron’s guidance, as the street was almost at $37.8 billion going into Thursday’s report.

Now we’ve seen these surges and drops in NAND and DRAM markets multiple times before, but at this point the good news is Micron is still solidly profitable, something that didn’t always happen in previous down cycles. In Q3, the company was able to generate more than $1.3 billion in adjusted free cash flow. However, spending a majority of that to buy back shares at an average price of about $71 looks poorly timed now. Management certainly has to adjust its supply here, as inventory on the balance sheet was up about $1.1 billion (or 24%) in the past year yet guidance is calling for sales to decline by a little more than a billion dollars (or about 13%) in the current quarter.

Initially in the after-hours session, Micron shares fell nearly 10%, hitting a new 52-week low of $50.10 before recovering and even turning positive at one point a little while later. The average price target on the street was $95 going into this report, but obviously that number will come down a bit as analysts cut their numbers moving forward. The chart below shows Micron shares over the past 5 years, and I added the purple line to show where I think a longer term support bottom could be had.

Right now, that potential bottom would be about $47, but I don’t know if the stock would fall that much in the short term unless US markets drop a bit more in the coming weeks. I will be curious to see if we see another guide down at the Q4 report for Micron, because another weak forecast would likely get shares to that support level. However, the business cycle should ultimately swing higher at some point, so I might be a buyer once we see analyst estimates start to level off and get more clarity on the medium term supply picture.

In the end, it turned out that all the fear into Micron’s earnings report was more than justified. While fiscal Q3 results were decent, the company guided to Q4 revenues and earnings well below even what most bearish analysts thought we’d see. With soft DRAM and NAND pricing coming as consumer spending seems a little pressured, shares of Micron hit a new 52-week low in the after-hours session. While I still believe in the company for the longer term, we need to see estimates come down to more realistic levels before looking for the stock to bottom.