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Wednesday, June 12, 2024

Micron CEO calls bottom in memory-chip market, but weak forecasts cut into expected AI gains

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Micron Technology Inc. shares rose in the extended session Wednesday after the memory-chip maker’s chief executive called the bottom on the sector, and quarterly results came in better than expected.

Micron
MU,
-3.80%

shares had jumped more than 5% after hours following the release of results, but by the end of the company’s conference call with analysts, the stock was up less than 2%. Shares finished Wednesday’s session with a 0.4% gain to close at $67.07, while the S&P 500 index
SPX,
+0.09%

declined less than 0.1%.

The Boise, Idaho-based company forecast an adjusted loss of $1.26 to $1.12 a share on revenue of $3.7 billion to $4.1 billion for the fourth quarter, while analysts surveyed by FactSet had estimated a loss of $1.07 a share on revenue of $3.88 billion for the fourth quarter, and a loss of $4.65 a share on revenue of $15.32 billion for the year.

Read: Snowflake stock rallies as ‘blizzard’ of AI product announcements make Wall Street happy

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In the near term, Micron Chief Executive Sanjay Mehrotra told analysts on the call that while sales forecasts received a considerable boost from larger-than-expected AI sales, forecasts for PC, smartphone and standard server sales are looking worse than feared, and will eat into those gains. All told, however, the CEO told analysts that supply reductions are beginning to stabilize the market.

Micron Chief Financial Officer Mark Murphy said the company took about $400 million in inventory write-downs in the third quarter, contributing to negative gross margins of 16%, an improvement of 15 percentage points sequentially. When Micron reported its worst loss ever a quarter ago, the company had taken a $1.4 billion inventory charge. When Micron started flashing signs of negative margins earlier in the year, many analysts saw that as signs of a bottom on the horizon.

Read: Is Micron selling memory chips for less than they cost to make? That may mean the bottom is near.

Micron makes two types of memory chips: DRAM, or dynamic random access memory, the type of memory commonly used in PCs and servers; and NAND, the flash memory chips used in smaller devices like smartphones and USB drives. After prices for memory soared early in the COVID-19 pandemic, companies overbought large stores of chips to avoid shortages, creating a glut.

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“As we have said before, AI servers have six to eight times the DRAM content of a regular server and three times the NAND content,” Mehrotra told analysts on the call. “In fact, some customers are deploying AI compute capability with substantially higher memory content.”

For the third quarter, Micron reported third-quarter loss of $1.9 billion, or $1.73 a share, versus net income of $2.63 billion, or $2.34 a share, in the year-ago period.

The adjusted loss, which excluded stock-based compensation expenses and other items, was $1.43 a share, versus net income of $2.59 a share in the year-ago period.

Revenue dropped to $3.75 billion from $8.64 billion in the year-ago quarter, as a two-year shortage of chips, triggered by the COVID pandemic, flipped quickly, but unevenly, into a glut around this time last year. Analysts surveyed by FactSet had forecast a loss of $1.61 a share on revenue of $3.65 billion.

“We believe that the memory industry has passed its trough in revenue, and we expect margins to improve as industry supply-demand balance is gradually restored,” Mehrotra had said in an earlier statement.

Read: Nvidia stock falls after CFO says no material impact from prospective wider ban on AI chip sales to China

The CEO also called a recent order by the Chinese government to stop using Micron chips because of alleged serious, but unspecified, risks “a significant headwind that is impacting our outlook and slowing our recovery.”

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On the call with analysts, Mehrotra said he expects to see a “record total addressable market in calendar 2025 along with a return to more normalized levels of profitability.”

Leading up to earnings, analysts had said that Micron is “at the bottom of this deep downturn,” but “China complicates the recovery plan.” For the year, Micron shares are up 34%, compared with the S&P 500’s 14% gain.



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