Micron – Supercycle pt. XI

Bottoming out?

• Micron reported lower-than-expected losses and guided better for the coming quarter as the company thinks that the worst is over in terms of weak demand and inventory correction giving a much-needed positive signal for the rest of the industry.
• FQ3 2023 revenues / Adj-EPS were $3.75bn / LOSS$1.43 compared to forecasts of $3.68bn / LOSS$1.57 but it was in the guidance and the commentary where the real surprise was to be found.
• FQ4 23 revenue will be around $4.1bn which is ahead of consensus forecasts of $3.87bn supporting the company’s view that “the memory industry has passed its trough in revenue”.
• Unfortunately, these good results were spoilt by events in China where I think that China has decided to retaliate against US restrictions using Micron which has been deemed to be a security risk.
• This will almost certainly lead to a significant hit being taken in China as its customers there switch to other providers.
• This is the feature of the Chinese action rather than the bug as almost every other action that China could have taken would have hurt China as much if not more than the USA-based target.
• I think that this is precisely why Micron failed the Chinese national security test meaning that Micron is collateral damage in the much wider ideological struggle between the USA and China.
• Putting this to one side, this is a sign of things stabilising rather than turning around as even at these somewhat higher levels, Micron is still losing money meaning that there is no sign of an upturn.
• There have been two factors that have hammered the semiconductor industry this year which are the fall in demand due to economic factors and the inventory correction.
• During the pandemic and with greater uncertainty on supply, device makers rushed to build inventories but now that supply is much more certain and the cost of capital much higher, it is no longer viable to carry so much inventory.
• Hence, for the last 3 quarters, inventories have been wound down which has had a disproportionately large effect on the semiconductor industry which suffers from both of these effects which compound off one another.
• If Micron’s commentary on memory applies to the rest of the industry, then there is some hope that one of the negative factors had burned itself out.
• The outlook for end demand remains unchanged and if interest rates are going to continue going up, the outlook for a recovery this side of 2024 remains pretty bleak.
• I continue to think that inflation is not going to return to target levels much before the middle of 2024 by when fiat currencies will have depreciated enough (in terms of inflation) for the money supply and GDP to be back in balance.
• It is at that time that interest rates can begin to fall and economic growth return to the economies of the world.
• As far as I can see, this is pretty much what Micron is describing in its commentary and so I remain pretty comfortable with this outlook.
• Hence, I suspect that when the rest of the industry reports its calendar Q2 results next month, it will have also seen an end to the inventory correction.
• This does not mean that there is an upturn in sight in end demand but hopefully, it does mean that things have stopped getting worse.
• Against this backdrop, I think that the cheaper end of the semiconductor sector will rally more than those already priced for AI perfection.
• Hence, I think that TSMC, Qualcomm and MediaTek have more scope to outperform the likes of Nvidia and AMD during H2 2023.