Micron Tech: Is the AI wave rising and the turning point here?

Micron Tech (MU.O) released its Q3 FY2023 financial report (ending in May 2023) after the US stock market closed on June 29, 2023. The key points are as follows:

1. Overall Performance: Emerging from the Storm. Micron Tech.US's total revenue in Q3 FY2023 was $37.52 billion, a YoY decrease of 56.6%. The significant decline in revenue was mainly due to the downturn in the storage industry. The company continued to incur substantial losses in Q3 FY2023, primarily affected by the industry downturn and inventory write-down.

2. Business Segments: DRAM & NAND, Bottoming Out. DRAM and NAND accounted for 98% of the company's revenue, and both segments experienced a decline of over 50% this quarter. This was mainly attributed to the overall weak demand in the storage industry, leading to significant price drops in DRAM and NAND products, thereby affecting the revenue of the business segments.

3. Outlook for the Next Quarter: The projected revenue for Q4 FY2023 is $3.7-4.1 billion (a YoY decrease of 41.3%), in line with the market consensus of $3.874 billion. The gross margin (GAAP) for the quarter is expected to be between -13% and -8%, with a continued improvement in gross margin QoQ.

Overall, Dolphin believes that Micron Tech's financial report slightly exceeded expectations.

Looking at this financial report, considering the downturn in the storage industry, the market has already lowered its expectations for the company. In terms of revenue, $37.52 billion is close to the market expectation of $37.02 billion. As for the gross margin, although it reported -17.8%, it is still significantly better than the market expectation of -22.9%. Dolphin believes that this is mainly because the actual inventory situation of the company in this quarter was better than expected, resulting in a lower inventory write-down than anticipated.

What the market is more concerned about is the company's outlook for the future. Although the company will continue to incur losses in the next quarter, there are signs of improvement. The revenue guidance for the next quarter is $3.7-4.1 billion, showing a QoQ increase. The gross margin guidance is between -8% and -13%, indicating an increase of more than 5% QoQ. Overall, the company has confidence in the bottoming out and improvement of its business.

Considering the financial report and the industry situation, Dolphin believes:

1) Industry Perspective: The storage industry has bottomed out. The company's gross margin in this quarter was negative, even after excluding the $400 million inventory write-down. *;

2) Company Overview: Significant improvement in inventory situation. Although the company still had inventory write-downs this quarter, the amount decreased significantly compared to the previous quarter. With the reduction in inventory write-downs, the company's gross margin is expected to continue to improve, which will help the company quickly turn losses into profits in terms of performance.

Overall, this financial report continues to signal the company's bottoming out and improvement. From an investment perspective, the company's stock price has risen by 34.46% since the beginning of the year. Part of this increase is due to the overall valuation increase of NASDAQ, and another part includes market expectations for the company's improvement. To sustain the upward trend in stock price, exceptional performance is needed to stimulate further growth. The progress in inventory clearance in this financial report is one of the factors contributing to it.

Since Dolphin published the first in-depth report on Micron on March 15, 2023, titled " Micron: Has the Storage Chip Giant Survived the Winter? ," the company's stock price has risen by over 25%. Dolphin will continue to track the dynamics of the US technology market, including Micron, and we welcome your continued attention.

The following is Dolphin's specific analysis of Micron's financial report:

I. Overall Performance: Emerging from the Storm

1.1 Revenue

Micron's total revenue for the third quarter of the 2023 fiscal year was $3.752 billion, a year-on-year decline of 56.6%, slightly exceeding market expectations ($3.702 billion). The year-on-year decline in revenue this quarter was mainly due to the downturn in the company's core businesses, DRAM and NAND. The downward trend in the storage industry since last year, coupled with weak downstream demand, directly affected product prices and shipment momentum.

1.2 Gross Margin

Micron achieved a gross loss of $668 million in the second quarter of the 2023 fiscal year, and the loss in gross margin has significantly narrowed.

Superficially, this was due to operating costs exceeding revenue this quarter. However, in reality, this was because

1.3 Operating Expenses

Micron's operating expenses for the third quarter of the 2023 fiscal year were $977 million, a year-on-year decrease of 5.8%. The operating expense ratio also decreased to 26%.

Breaking down the specific expenses:

1) Selling and administrative expenses: $219 million this quarter, a year-on-year decrease of 17%. The selling and administrative expense ratio was 5.8%, a 2.7 percentage point increase compared to the previous year, mainly due to changes in revenue. There is a certain relationship between sales expenses and revenue performance. They decreased this quarter, while administrative expenses remained relatively fixed. In absolute terms, the company continued to control expenses this quarter; 2) R&D Expenses: The R&D expenses for this quarter were $758 million, a decrease of 1.9% compared to the same period last year. R&D expenses are the largest source of operating expenses for the company, with an R&D expense ratio of 20.2% this quarter. As a technology company, the company places greater emphasis on research and development capabilities. However, in absolute terms, the company's R&D expenses continued to decline this quarter. This is mainly due to the pressure on performance caused by the downturn in the industry, which has led to some control over R&D investment.

1.4 Net Profit Situation

Micron Technology achieved a net loss of $1.896 billion in the third quarter of the 2023 fiscal year, a decrease of 172% compared to the same period last year, continuing to incur significant losses. In this quarter, the company's net profit margin was -50.5%.

II. Business Segments: DRAM & NAND, Bottoming Out

From the previous in-depth analysis of Micron Technology by Dolphin, "Micron: Has the Winter for Memory Chip Giants Ended?" (link: Micron: Has the Winter for Memory Chip Giants Ended?), the company's largest source of revenue is memory chips. From the latest financial report, DRAM and NAND are still the most important sources of revenue for the company, accounting for a combined total of 98%. Therefore, the changes in Micron's business mainly depend on the situation of the DRAM and NAND businesses.

2.1 DRAM

DRAM is the company's largest source of revenue, accounting for over 70%. However, the company's DRAM business revenue for this quarter was only $2.672 billion, a decrease of 57.4% compared to the same period last year. This is mainly due to declining product prices in the face of weak demand.

Looking at the quarterly data, Micron's DRAM business is still showing a decline this quarter, with a further decrease of 1.9% compared to the previous quarter.

Dolphin believes that the DRAM industry has not yet emerged from its downturn, and product prices continue to decline. Taking DDR4 4G (512M*8) 1600MHz as an example, the product price has dropped from $1.153 in early March 2023 to $1.018 in early June.

2.2NAND

NAND is the company's second largest source of revenue, accounting for 20-30%. However, the company's NAND business revenue for this quarter was $1.013 billion, a YoY decrease of 55.7%. Although NAND's impact on the company's performance is not as significant as DRAM, the decline in revenue this quarter also affected the company's revenue situation.

Looking at the market price of NAND, taking NAND Flash 64Gb 8G*8 MLC as an example, the product was priced at $3.852 in early March 2023, and the price increased to $3.854 in early June. The market price of NAND products may have started to rebound.