- Micron manufactures computer chips for industries and consumer products.
- Due to the high demand for chips, Micron’s profits have been stellar.
- With an economic slowdown looming, Micron is pausing manufacturing in hopes of reducing inventory levels.
Computers power everything from the phones in our pockets to the cars we drive. As a result, semiconductors are an integral part of almost everything we own, and Micron is the world leader in this industry. As an investor, you have probably heard a lot about this company lately. Here are more details about Micron, what they do, and why you should consider making these stocks part of your investment portfolio.
Micron’s business model
Micron manufactures and develops memory and storage products for the automotive and healthcare industries, and for personal computers, data centers and networks. Its business model consists of four segments:
- Computing and Network Business Unit (CNBU)
- Mobile Business Unit (MBU)
- Storage Business Unit (SBU)
- Integrated Business Unit (EBU)
Here’s a closer look at each of these segments.
Computing and Network Business Unit (CNBU)
This segment sells computer memory products to cloud server, network, graphics, and enterprise customers. For the third quarter of fiscal 2022, this segment had $3.8 billion in revenue, an increase of 18% compared to the third quarter of fiscal 2021. Operating income for the current quarter was $1.7 billion, an increase 32% compared to the same period last year. This segment led all segments in both revenue and revenue.
Mobile Business Unit (MBU)
This segment sells memory and storage for smartphones and other mobile devices. Revenue for the third quarter of fiscal 2022 was $1.9 billion and was flat compared to the same period a year ago. Revenue was $600 million, again flat compared to the same quarter a year ago.
Storage Business Unit (SBU)
The SBU sells hard drives and other storage solutions to enterprise, cloud, and consumer customers. Third quarter 2022 revenue was $1.3 billion, an increase of 32% from the prior year quarter. Revenue was $221 million, an increase of 300% compared to $53 million in the third quarter of 2021.
Integrated Business Unit (EBU)
This segment sells memory and storage products to the automotive and industrial industries and consumer markets. Third-quarter revenue was $1.4 billion, an increase of 30% from $1.1 billion in the prior year quarter. Revenue increased from $282 million in the third quarter of fiscal 2021 to $504 million for the current quarter, an increase of 78%.
Until recently, all of Micron’s chip manufacturing was done 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 that were felt during the pandemic. With many countries in lockdown, it was difficult to produce enough chips to meet demand. This is why so many vehicles are sitting in car lots, waiting for tokens.
That said, the company is also ramping up production in Japan, where the country gives Micron a $320 million subsidy to make chips there.
The state of Micron’s finances
Overall, Micron’s financial performance beat analysts’ expectations. In the fiscal year 2022 earnings call, Micron reported a profit of $8.7 billion for its fiscal year, which represents an increase of 48% compared to its fiscal year 2021. For the fourth quarter of fiscal year 2022, the revenue was $6.6 billion.
Looking ahead, Micron estimates revenue of $4.25 billion in the first quarter of fiscal 2023, with gross margins of 25%. The revenue estimate is a 45% drop compared to its previous earnings for the first quarter of fiscal 2022.
Why is Micron warning investors that earnings will decline? In a nutshell, 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 around the world has changed the situation. There is now an ample supply of chips and the demand is drying up. Companies are hesitant to make purchases because they are uncertain about the future. Will they stop hiring or will they have to lay off workers? Will they remain stable until the economy changes?
Also, consumers do not need to buy new computers because they already have one or are returning to the office where a computer can be provided. Combine this and you have a lack of demand that will hurt semiconductor stocks.
The good news is that Micron is in good financial shape to ride out the recession. They have approximately $9 billion in cash and $7 billion in current liabilities. They are also closing factories at short notice to limit production and reduce inventory. For the third quarter of fiscal 2022, inventories totaled $5.6 billion, an increase of 25% compared to the fourth quarter of fiscal 2021.
This is reflected in Micron’s share price, which is down 45% year to date. If the outlook for the economy were more optimistic, this stock would be much higher, given the positive financials the company reported.
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), NXP Semiconductors (NXPI), STMicroelectronics (STM), and ON Semiconductor (ON). However, they all face the same problems, so investors should not run away from one and hope for a better result with another.
This does not mean that investors should avoid these stocks entirely. While demand is softening now, it won’t dry up. When the economy starts to recover, these companies will show gains in their share prices.
Micron is in a strong financial position to weather the downturn in the economy. While its recent financial track record has been strong, investors should brace for worse results in coming quarters. The good news is that company executives are aware of the looming slowdown and have alerted investors. Now is the time to follow the action as it moves and choose your places to start investing.
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