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shares of Micron Technology (NASDAQ:MU🇧🇷 fell to new low territory after quarterly results shocked investors even when expectations were already really low.
My last opinion of the company dates back to October 2020, over two years ago when I concluded that Micron was essentially a commodity player in a structural growth industry; I was not an active stock hunter.
By accident, Micron’s stock traded at $50, the same levels it trades today, but that was, of course, before the stock hit the $100 mark in the spring of 2021 and even into early 2022.
Some recaps
Micron has been riding a wave of increased demand for its products due to strong growth as a result of centuries-old trends that turned a former commodity business into a structural growth game. This not only resulted in rising earnings, but investors believed that the longevity of those earnings had also improved.
By 2010, Micron was a business generating about $8 billion in break-even sales, operating in a very competitive industry. The business grew in 2014/2015, when sales doubled to $16 billion and earnings reached around $3 billion. Sales stagnated for a few years and climbed to $30 billion in 2018, while operating profits rose to $15 billion that year (with profits even surpassing reported revenues a few years earlier). Earning power of more than $10 per share was not considered sustainable as the stock rose to the $60 mark at the time.
After peaking sales in 2018, revenue dropped to $23 billion in 2019 and further declined to $21 billion in 2020. Operating profit fell from $15 billion in 2018 to $7 billion in 2019 and to just $3 billion in 2020, net income of $2.7 billion reached $2.37 per share, while Micron operated with a net cash position of $2.6 billion.
Setting the long-term sales trend at around $25 billion and margins at around 20%, the average earning power over the cycle was set at $3.50 per share. With the shares trading at around $50 a share and the company holding cash on the order of $2 a share, valuations looked reasonable at around 14 times average earnings, but these were very volatile earnings. The bull-bear debate was active with bears believing this remains a long-term commodity cyclical game, while bulls believe megatrends would result in structural demand.
Given the state of the markets in general and net capital expenditure requirements consuming virtually all prevailing earning power, I saw no reason to get involved.
boom-bust
After a more difficult 2020, Micron saw a recovery in its 2021 results, released in September 2021. Revenue increased from US$ 21 billion and changed to US$ 27 billion. The company posted GAAP earnings of nearly $6 billion, equivalent to $5.14 per share, with non-GAAP earnings amounting to nearly a dollar per share more. Momentum was already much stronger as fourth-quarter revenue reached $33 billion on earnings close to $11 billion, or $10 per share, and net cash was $3.6 billion. .
Perhaps somewhat problematic, as the company guided first-quarter sales to just over $30 billion, with earnings of around $8 a share being an early indication that momentum had already worn off.
In September of this year, the company reported its 2022 results with revenues approaching $31 billion, GAAP earnings of $8 billion and earnings of approximately $8 per share. The problem is that fourth-quarter results are down $2 billion annually, trending down to just $25 billion a year. Furthermore, earning power had already dropped to $5-6 per share. Net cash increased slightly to $4.1 billion, equivalent to about $4 per share.
By this time, the stock had dropped from $100 at the start of the year (equivalent to about 10 to 12 times peak earnings) to the high fifties. This came as the company guided first-quarter sales of around $4.25 billion, with the company poised to post break-even results. Despite worsening conditions, Micron announced a massive $15 billion expansion project in Boise, Idaho, earlier this fall.
In November, the company announced that it was cutting DRAM and NAND wafer starts by a further 20% from the fourth quarter of FY 2022, indicating ongoing issues, suggesting that the first quarter would be weak.
In December, first-quarter sales were found to be $4.1 billion, slightly weaker than already projected. The company posted a GAAP loss of $195 million. Reduced earnings power resulted in net cash falling to $1.8 billion amid some buybacks and net equity investments in addition to reported losses. Worryingly, second-quarter sales dropped even further to $3.80 billion, marking a $290 million decrease from first-quarter results.
Second-quarter adjusted losses per share increased from $0.04 to $0.62 per share, indicating a headwind of more than $600 million to earnings, rising twice as fast as the decline in sales, signs worrisome. While net cash has dropped sharply, the absolute cash position of around $12 billion is huge, providing Micron with plenty of liquidity to weather this wave.
And now?
Micron is having some really tough times right now as the storm seems manageable, or so it seems. The question is what the actual deal execution rate is, perhaps still seen around $25 billion over the cycle at 20% margins, resulting in operating earnings of around $5 billion. With low tax rates as well as net interest expense, earning power could likely exceed $4 billion in this case, still equal to about $3.50 per share.
So we are completely back where we were around 2020, with the stock trading at the same level as it was then, net cash balances are pretty similar, and earnings per share over the cycle are still seen at around $ 3.50 per share if you ask me. At this time, we are still in cyclical decline mode as the company continues to resort to cost cutting, announcing a 10% reduction in workforce.
The reality is that, much like 2020, I’m still not convinced this is the time to jump in. Sure, the stock traded around the $100 mark in the intervening period, but that was driven by a large bull market as a reversal. of recently seen earning power is far from a given here. This remains a show-me story, with further backtracking to the lower forty years required before I can be seduced into altering this neutral stance.