Micron reports largest loss on record as memory-chip market melts down, but stock gains as execs say inventory issues have peaked

Micron
MU,
-0.85%
reported a fiscal second-quarter loss of $2.31 billion, or $2.12 a share, on sales of $3.69 billion, down from $7.79 billion a year ago. The previous largest quarterly loss on a GAAP basis for the company was $1.94 billion in the same quarter of 2003, according to FactSet records. After accounting for stock-based compensation and restructuring costs from recent layoffs, the Idaho-based memory-chip specialist reported a loss of $1.91 a share, after reporting adjusted earnings of $2.14 a share a year ago.

Analysts on average were expecting an adjusted loss of 67 cents a share on sales of $3.71 billion, according to FactSet. Micron shares gained more than 1% in after-hours trading immediately following the release of the results, after closing with a 0.9% decline at $59.28.

Micron has suffered as the market for memory chips has melted down along with demand for many of the items that its core products go into, such as personal computers, smartphones and cloud-computing servers. After the need for memory surged as consumers and businesses frantically stocked up on electronics early in the COVID-19 pandemic, a slowdown in purchases led to increasing inventories and rapidly declining prices for memory chips.

Analysts were widely predicting an inventory write-down after competitors Samsung Electronics Co. Ltd.
005930,
+1.29%
and SK Hynix Inc.
000660,
+3.39%
made similar moves in recent earnings reports, and the company’s chief financial officer hinted at such a move earlier this month. The only disagreement focused on the size: Citi Research analyst Christopher Danely believed Micron would write down roughly $1 billion or more in order to “lower inventory days and make it easier for Micron to sell off inventory,” while TD Cowen analyst Krish Sankar aimed lower, predicting a write-down of $550 million to $850 million.

The final total was higher than any of those estimates at $1.43 billion, or $1.34 a share. Micron also said it would increase plans to shrink its workforce to a 15% reduction from previous guidance of 10%.

The other debate among analysts concerns when the bottom for the memory market will be reached. Danely sees a bottom approaching in the next six months, while Evercore ISI analysts led by CJ Muse say a “March/April fundamental bottom remains our cyclical view.”

“We expect Micron’s margins/earnings to bottom in May-23Q (ex write-off), and believe that aggressive production cuts in the industry will set the stage for a cyclical recovery starting in [the second half of the year],” Raymond James analyst Srini Pajjuri wrote this week, roughly splitting the difference.

Micron’s forecast will influence those projections, and the company disclosed Thursday that it expects another write-down of roughly $500 million in the third quarter as gross margins remain negative. Executives on Tuesday guided for a fiscal third-quarter adjusted loss of $1.51 to $1.65 a share on sales of $3.5 billion to $3.9 billion, and predicted a gross margin of negative-20.5% to negative-25.5%.

Still, in prepared remarks, executives suggested a bottom is near.

“We believe we are close to a transition to sequential revenue growth in our quarterly results,” Chief Financial Officer Mark Murphy said in prepared remarks. “We are focused on significantly improving profitability and returning to positive quarterly free-cash flow within fiscal 2024.”

Micron stock has declined more than 26% in the past 12 months, but has rebounded in 2023 with a gain of more than 18%, as investors attempt to time a rebound in the memory market. The S&P 500 index
SPX,
-0.16%
has declined 13.1% in the past 12 months and gained 3.6% so far in 2023.