Key takeaways
- Micron manufactures computer chips for industries and consumer products.
- Due to the high demand for chips, Micron's earnings have been stellar.
- With an economic slowdown looming, Micron is pausing manufacturing in hopes of lowering inventory levels.
Computers power everything, from the phones in our pockets to the cars we drive. As a result, semiconductors are integral to almost everything we own, and Micron is the global leader in this industry. As an investor, you've likely been hearing a great deal about this company lately. Here are more details about Micron, what they do, and why you should consider making this stock a part of your investment portfolio.
Micron's business model
Micron manufactures and develops memory and storage products for the healthcare and automotive industries, and for personal computers, data centers, and networks. Their business model consists of four segments:
- Compute and Networking Business Unit (CNBU)
- Mobile Business Unit (MBU)
- Storage Business Unit (SBU)
- Embedded Business Unit (EBU)
Here is a closer look at each of these segments.
Compute and Networking Business Unit (CNBU)
This segment sells computer memory products to cloud servers, networking, graphics, and enterprise clients. For the third quarter of the 2022 fiscal year, this segment had $3.8 billion in revenue, an 18% increase compared to the third quarter of the 2021 fiscal year. Operating income for the current quarter came in at $1.7 billion, a 32% increase versus the same period last year. This segment led all segments for both income and revenue.
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Mobile Business Unit (MBU)
This segment sells memory and storage for smartphones and other mobile devices. Revenue for the third quarter of the 2022 fiscal year was $1.9 billion and was flat compared to the year-ago period. Income was $600 million, again flat compared to the same quarter in the prior year.
Storage Business Unit (SBU)
The SBU sells hard drives and other storage solutions to enterprise, cloud, and consumer clients. Revenue for the third quarter of 2022 came in at $1.3 billion, an increase of 32% from the same quarter a year ago. Income was $221 million, a 300% increase versus the $53 million earned in the third quarter of 2021.
Embedded Business Unit (EBU)
This segment sells memory and storage products to the automotive and industrial industries and consumer markets. Revenue for the third quarter was $1.4 billion, an increase of 30% over the $1.1 billion from the same quarter a year ago. Income rose from $282 million in the third quarter of the 2021 fiscal year to $504 million for the current quarter, an increase of 78%.
Until recently, all of Micron's chip manufacturing has been in East and Southeast Asia, including Singapore, Taiwan, and Japan. However, the company recently decided to move some manufacturing to the US and is building a plant in upstate New York.
Their main motivation for this is the supply chain issues felt during the pandemic. With many countries on lockdown, it was hard to produce enough chips to meet demand. This is why so many vehicles are sitting in car lots, just waiting for chips.
With that said, the company is also increasing production in Japan, where the country is giving Micron a $320 million subsidy for manufacturing chips there.
The state of Micron's financials
Overall, Micron’s financial performance is exceeding analysts' expectations. In the 2022 fiscal year earnings call, Micron reported a profit of $8.7 billion for its fiscal year, which is an increase of 48% compared to its 2021 fiscal year. For the fourth quarter of the 2022 fiscal year, revenue was $6.6 billion.
Looking ahead, Micron is estimating $4.25 billion of revenue in the first quarter of the 2023 fiscal year, with gross margins of 25%. The revenue estimate is a drop of 45% compared to its previous earnings for the first quarter of the fiscal year 2022.
The future for Micron
Why is Micron warning investors that revenue will be down? Simply put, the economic principle of supply and demand. During the pandemic, the demand for memory chips was sky-high, and the supply of chips was low. Therefore, Micron was charging a premium for its products.
Fast forward to today, and the slowdown in the US economy and economies worldwide has flipped the situation around. Now there is an ample supply of chips, and the demand is drying up. Businesses are hesitant to make purchases because they are unsure of the future. Will they stop hiring or have to lay off workers? Will they hold steady until the economy turns around?
In addition, consumers don't need to purchase new computers because they already have one or are returning to the office where a computer may be provided. Combine these, and you have a lack of demand that will hurt semiconductor stocks.
The good news is that Micron is in good financial shape to handle the downturn. They have roughly $9 billion in cash and $7 billion in current liabilities. They are also shutting down factories in the short term to limit production and reduce inventory. For the third quarter of the 2022 fiscal year, inventories totaled $5.6 billion, an increase of 25% compared to the fourth quarter of the 2021 fiscal year.
This reflects in the stock price of Micron, which is down 45% year to date. If the outlook for the economy were rosier, this stock would be much higher, given the positive financials the company reported.
Alternatives to Micron
There are other semiconductor manufacturers out there, including Analog Devices (ADI), Microchip Technology (MCHP), Monolithic Power Systems (MPWR), Intel (INTC), Texas Instruments (TXN), Broadcom (AVGO), Applied Materials (AMAT), NXP Semiconductors (NXPI), STMicroelectronics (STM), and ON Semiconductor (ON). However, they are all facing the same issues, so investors should not flee from one and expect a better outcome with another.
This doesn't mean investors should avoid these stocks altogether. While demand is softening now, it will not dry up. When the economy begins to pick up steam, these companies will show gains in their stock prices.
The bottom line
Micron is in a strong place financially to weather the slowing economy. While their recent financial history has been solid, investors should brace for poorer results in the coming quarters. The good news is that company executives are aware of the coming slowdown and have alerted investors. Now is the time to follow the stock as it moves and pick your spots to begin investing.
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