Where Will Micron Technology's Stock Be in 1 Year?

Micron Technology (MU 3.06%) posted its latest earnings report on March 28. For the second quarter of fiscal 2023, which ended on March 2, the memory chipmaker's revenue fell 53% year over year to $3.69 billion and narrowly missed analysts' expectations by $20 million. It posted an adjusted net loss of $2.08 billion, compared to a net profit of $2.44 billion a year ago, as its adjusted net loss of $1.91 per share broadly missed the consensus forecast by $1.03.

Those disappointing numbers suggest Micron's cyclical decline hasn't ended yet. But its stock has already retreated nearly 40% from its all-time high of $96.60 on Jan. 14, 2022. Could it be poised to rebound over the next 12 months?

Image source: Getty Images.

When will Micron's cyclical slowdown end?

During the second quarter, Micron generated 74% of its revenue from DRAM chips and 24% of its revenue from NAND (flash memory) chips. The remaining 2% came from other types of memory chips. Its sales of DRAM and NAND chips have declined year over year for three consecutive quarters, and its adjusted gross margins have plummeted into negative territory:

Data source: Micron. YOY = year over year. 

Those declines were caused by the post-pandemic deceleration of the PC market, slower upgrades to 5G smartphones, macro headwinds for data center upgrades, and disruptions from the intermittent COVID-19 lockdowns in China. Micron also still faces intense competition from its larger rival Samsung in both the DRAM and NAND markets.

Micron's negative adjusted gross margin of 31.4% in the second quarter, which it mainly pinned on a whopping $1.43 billion in inventory writedowns, also came in much lower than its previous guidance for a positive adjusted gross margin of 2.5%-8.5%. But it had to take those writedowns as its projected selling prices dropped below its cost of inventories.

For the third quarter, Micron expects its revenue to decline another 55%-59% year over year as its adjusted gross margin comes in at negative 18.5%-23.5%. Therefore, Micron probably hasn't reached its cyclical trough yet.

During the conference call, CEO Sanjay Mehrotra admitted the "profitability levels in the industry today are simply not sustainable," but that its ongoing "supply growth reductions" would "ultimately lead to the industry to recover to healthier levels." Mehrotra also said it would continue to cut costs by laying off about 15% of its workforce this year.

Micron also took on another $1.9 billion in long-term debt to boost its liquidity during the second quarter, which boosted its total debt to $12.3 billion. But its debt-to-equity ratio remains relatively low at 0.4, and it still held $10.8 billion in cash, cash equivalents, and short-term investments at the end of the quarter.

Is this the right time to buy Micron?

Micron has endured plenty of cyclical downturns before. Analysts expect its revenue to decline 49% in fiscal 2023, but rise 37% in fiscal 2024 as the memory market warms up again. Based on those expectations, Micron's stock looks cheap at less than three times next year's sales. It's also expected to turn profitable again in fiscal 2024.

There are still plenty of catalysts on the horizon. The growth of the AI market could boost the market's demand for new data center chips, the PC and smartphone markets could stabilize, and automakers and industrial machine makers should scoop up more chips in a more favorable macro environment. It should also benefit from the CHIPS and Science Act, which will grant subsidies and tax breaks to U.S. chipmakers like Micron that manufacture their own chips at domestic foundries.

But there are other unpredictable headwinds. Chinese regulators recently launched a cybersecurity probe into Micron in an escalation of the trade tensions between Beijing and Washington, and a ban on Micron's chips in China could prolong its cyclical downturn. Even if China doesn't ban Micron's chips, the U.S. could still impose additional restrictions, which could make it difficult to serve the Chinese market.

Lastly, a proposal to "pause" the development of higher-end generative AI technologies to evaluate the risks for at least six months -- which has been supported by Elon Musk, Steve Wozniak, and other tech industry leaders -- could snuff out the market's enthusiasm for AI projects.

Unless those issues are resolved, I believe Micron's stock will trade sideways for at least the next 12 months. Micron's downside potential might be limited, but it's smarter to buy foundational semiconductor plays like ASML and TSMC instead of betting on the eventual recovery of Micron's memory chipmaking business.