- Micron makes computer chips for industrial and consumer products.
- Micron’s earnings have been solid due to high demand for chips.
- With an economic slowdown looming, Micron is suspending production in hopes of reducing inventory levels.
Computers power everything from the phones in our pockets to the cars we drive. So, almost everything we own depends on semiconductors, and Micron is the global leader in that industry. As an investor, you’ve probably heard a lot about this company lately. Here are more details about Micron, what they do, and why you should consider this stock as part of your portfolio.
Micron’s business model
Micron manufactures and develops memory and storage products for the healthcare and automotive industries, as well as for personal computers, data centers and networking. Their business model consists of four parts:
- Computing and Networking Business Unit (CNBU)
- Mobile Business Unit (MBU)
- Storage Business Unit (SBU)
- Embedded Business Unit (EBU)
The following is a detailed introduction to these segments.
Computing and Networking Business Unit (CNBU)
This segment sells computer memory products to cloud server, networking, graphics and enterprise customers. In the third quarter of fiscal 2022, the segment’s revenue was $3.8 billion, an increase of 18% over the third quarter of fiscal 2021. Operating income for the quarter was $1.7 billion, an increase of 32% over the same period last year. This segment leads all segments in both revenue and revenue.
Mobile Business Unit (MBU)
This segment sells memory and storage devices for smartphones and other mobile devices. Revenue for the third quarter of fiscal 2022 was $1.9 billion, flat compared to the same period last year. Revenue was $600 million, again flat year over year.
Storage Business Unit (SBU)
SBU sells hard drives and other storage solutions to enterprise, cloud and consumer customers. Revenue for the third quarter of 2022 was $1.3 billion, up 32% from the same period last year. Revenue was $221 million, up 300% from $53 million in the third quarter of 2021.
Embedded Business Unit (EBU)
This segment sells memory and storage products to the automotive and industrial industries, as well as the consumer market. Third-quarter revenue was $1.4 billion, up 30% from $1.1 billion a year earlier. Revenue increased 78% from $282 million in the third quarter of fiscal 2021 to $504 million in the current quarter.
Until recently, all of Micron’s chip manufacturing was in East and Southeast Asia, including Singapore, Taiwan and Japan. However, the company recently decided to move some of its manufacturing operations to the U.S. and is building a plant in upstate New York.
Their main motivation for doing so was the supply chain issues felt during the pandemic. With many countries under lockdown, it is difficult to produce enough chips to meet demand. That’s why so many vehicles are parked in parking lots just waiting for chips.
That said, the company is also ramping up production in Japan, which is giving Micron $320 million in subsidies to make chips there.
Overall, Micron’s financial performance beat analysts’ expectations. On its fiscal 2022 earnings call, Micron reported fiscal year profit of $8.7 billion, up 48% from fiscal 2021. Revenue for the fourth quarter of fiscal 2022 was $6.6 billion.
Looking ahead, Micron expects revenue of $4.25 billion in the first quarter of fiscal 2023 and a gross margin of 25%. Revenues are estimated to be down 45% compared to prior fiscal 2022 first-quarter earnings.
Why is Micron warning investors about falling revenue? Simply put, it is the economics principle of supply and demand. During the epidemic, memory chips were in high demand and low in supply. As a result, Micron charges a premium for its products.
Fast forward to today, and the slowdown in the U.S. economy and the global economy has reversed course. Now that chips are in abundant supply, demand is drying up. Businesses are hesitant to buy because they are uncertain about the future. Will they stop hiring or have to lay off staff? Will they remain stable until the economy improves?
In addition, consumers do not need to buy a new computer because they already own one or are returning to an office that may provide a computer. Combine these and you have a lack of demand that hurts semiconductor stocks.
The good news is that Micron is in good financial shape and can weather a downturn. They have about $9 billion in cash and $7 billion in current liabilities. They are also closing factories in the short term to limit production and reduce inventories. In the third quarter of fiscal 2022, inventory totaled $5.6 billion, a 25% increase from the fourth quarter of fiscal 2021.
That’s reflected in Micron’s stock, which is down 45% so far this year. Given the company’s reported positive financials, the stock would be much higher if the economic outlook were more positive.
Alternatives to Micron
There are other semiconductor manufacturers, including Analog Devices (ADI), Microchip Technology (MCHP), Monolithic Power Systems (MPWR), Intel (INTC), Texas Instruments (TXN), Broadcom (AVGO), Applied Materials (AMAT), NX Semiconductor (NXPI), STMicroelectronics (STM) and ON Semiconductor (ON). However, they all face the same issues, so investors shouldn’t run away from one and expect a better outcome from the other.
That doesn’t mean investors should avoid these stocks entirely. While demand is waning now, it won’t dry up. When the economy starts to recover, the stock prices of these companies will rise.
Micron is financially well positioned to weather an economic slowdown. While their recent financial history has been solid, investors should brace for poor results in the coming quarters. The good news is that company executives are aware of the impending economic slowdown and have warned investors. Now is the time to follow the movement of the stock and choose your position to start investing.
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