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Micron Technology Inc. may be paying more to make memory chips than the price it is charging for them, according to one analyst who believes that could actually be a good sign.
The last time Micron’s
MU,
gross margins went negative was during the 2008 financial crisis, according to Citi Research analyst Christopher Danely, who believes the company will report negative gross margins when it gives its fiscal second-quarter results on Tuesday afternoon. The silver lining in that cloud: “The last time Micron had negative gross margins, it marked the bottom in the stock,” he said.
Micron’s gross margins hit a bottom in November 2008, when the company was paying, on average, $1.30 to make a chip it could only sell for $1, according to the analyst’s data. That was also when Micron’s stock reached its lowest point in roughly 16 years, a valley that Micron shares have not neared since.
Micron did not guide for negative gross margins, predicting a gross margin of 5% to 10% in December, and analysts on average expect gross income of $312 million on revenue of $3.71 billion. Danely, however, believes that this report will come in much worse than the collective consensus on Wall Street for both revenue and net losses, and he also predicts a massive write-down.
“We expect Micron to incur a write-down of inventory, likely in the range of a billion,” Danely said. “We believe this will lower inventory days and make it easier for Micron to sell off inventory.”
For more: The tech hardware industry is full of red flags, and this analyst sees only one exception
For months, Wall Street analysts have been chasing the bottom for the memory-chip industry and have also been warning of slowing growth from cloud-service providers, known in industry parlance as “hyperscalers,” like Microsoft Corp.’s
MSFT,
Azure, Amazon.com Inc.’s
AMZN,
AWS, Alphabet Inc.’s
GOOG,
GOOGL,
Google Cloud Platform and Oracle Corp.’s
ORCL,
Cloud Infrastructure. In late February, Danely warned that chip stocks could fall another 30% before they recover.
Micron specializes in DRAM, or dynamic random access memory, the type of memory commonly used in PCs and data centers, and in NAND chips, which are the flash memory chips used in smaller devices like smartphones and USB drives. The prices of those chips have plunged — DRAM and NAND both saw quarter-over-quarter price declines of greater than 20% in Micron’s fiscal first quarter, and analysts expect Micron to report a similar decline in DRAM prices in the just completed quarter, while NAND’s average selling price is expected to fall 7.4%.
While predicting a rough earnings report from Micron, Danely maintained his buy rating and $75 price target on the stock, as he believes that shares will recover once the bottom of the memory market is reached.
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“While we expect another lowering of estimates, our reasons to be positive on Micron remain unchanged: we believe capex and utilization cuts by Micron and [SK] Hynix
000660,
should create a bottom to the DRAM market over the next six months, and [Micron] is trading close to trough valuation,” Danely said in a recent note.
Micron shares are down 23% in the past year but have gained 20% so far in 2023. The S&P 500
SPX,
has declined 12.6% in the past 12 months and gained 3.4% in 2023.
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