Micron’s Weak Outlook Crushes Chip Stocks. There’s More Trouble Coming for Tech.

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Almost every analyst on Wall Street knew that the memory chip company

Micron

Technology was likely to provide quarterly guidance below previous Street estimates.

And that’s exactly what happened. Micron’s revenue outlook for the August quarter came in almost $2 billion below the old consensus level.

Micron shares are trading sharply lower on Friday, down 6% to $52.02 after hitting a 52-week low earlier in the session. The stock’s tumble triggered broad declines in chip and semiconductor equipment stocks—apparently, the outlook was even worse than feared.

For the August quarter, Micron is projecting revenue of $7.2 billion, with non-GAAP profits of $1.63 a share. The Street had been looking for $9.1 billion of revenue and non-GAAP profits of $2.62 a share. The company called out softening PC and smartphone sales as the primary problem. Micron now sees global calendar 2022 PC units down 10% from 2021; they’d previously expected flat sales. For smartphones, Micron now sees unit sales down in the mid-single digits; their old view called for percentage growth in the mid-single digits.

In particular, the company called out much-weaker-than-expected consumer demand in China—Micron Chief Business Officer Sumit Sadana said in an interview that Micron’s revised view for August quarter shipments to China are down 30% from their forecast just one quarter earlier. 

Micron’s stark warning has triggered widespread selling of other chip and equipment stocks, with the

SOX
,
the widely tracked semiconductor index, down 4.6%. Among other large-cap chip shares,

Intel

(INTC),

Advanced Micro Devices

(

AMD

),

Qualcomm

(

QCOM

), and

Nvidia

(NVDA) are down about 4%. The contract chip manufacturer

Taiwan Semiconductor

(TSM) is down 6%, while

Western Digital

(WDC), which competes with Micron in flash memory, is off 6.5%

Equipment stocks are falling even harder on Micron’s comments on reduced capital equipment spending plans, with

Applied Materials

(AMAT) and ASML (ASML) off 6%,

KLA

(KLAC) down 7% and

Lam Research

nearly 8% lower.

Also trading off are the PC makers Dell Technologies (DELL), off 7%, and

HP Inc
.
(HPQ), down almost 4%.

For some Wall Street analysts, the lowered guidance signals a tougher outlook more broadly among tech companies.

Citi

analyst Christopher Danely, who covers Micron and other chip stocks, asserts that this is likely to be “the first of many companies lowering guidance over the next few quarters.”

Wall Street also offered muddled commentary around the outlook for data center applications. While Micron said that demand remains robust, Sadana also noted that enterprise customer inventories are above pre-Covid levels—any customer moves to moderate spending due to a potential recession could spur inventory drawdown, which could impact demand.

BoA Global Research analyst Vivek Arya responded to the earnings report by cutting his rating on Micron shares to Neutral from Buy, while trimming his target price to $62 from $70. While the stock’s valuation remains low, Arya writes that a fundamental growth recovery might not arrive before well into calendar 2023. In particular, he notes that “yellow flags” are emerging from cloud and enterprise customers.

Barclays analyst Tom O’Malley, makes a similar point. Despite the soft August quarter guidance, Micron “still hasn’t fully paid the piper on the demand side,” with data center yet to see any weakness, he writes in a research note.

“We think consumer markets further weaken and there are already indications of slowing in the server market that will lead to additional cuts,” writes O’Malley, who still has an Overweight rating on Micron.

Micron is also shifting to a more conservative posture on adding capacity, and now expects spending on wafer fab equipment in the August 2023 fiscal year to be down from the roughly $12 billion it expected to spend in fiscal 2022. (Sadana declined to provide a more precise forecast.)

Citi semi equipment stock analyst Atif Malik keeps his forecast for $80 billion in global wafer fab spending in 2023, which would be down 16% from his 2022 estimate of $95 billion. In the coming months, he expects “broad capex cut announcements” from memory chip companies and second-tier foundries, and delays at top-tier foundries.

There are a couple of positive offsets for Micron investors, however. For one thing, the company bought back nearly $1 billion of stock in the May quarter, and vowed to get more aggressive on stock repurchases in the August quarter. And a number of analysts pointed out that the stock is now trading just a hair above book value, providing some downside protection for investors.

Write to Eric J. Savitz at [email protected]