A cocktail of global macroeconomic headwinds has driven a microchip industry that, last year, struggled to meet demand into an oversupply-driven price collapse. Micron Technology posted a severe revenue and earnings miss and announced plans to reduce headcount by 10% in 2023.
- Micron Technology to reduce headcount 10% as earnings implode
- Oversupply of microchips blamed for falling prices
- Invesco Dynamic Semiconductors ETF down 32% year-to-date
Micron Technology [MU] has stated its intention to implement radical cost-cutting measures through 2023 including a 10% reduction in headcount and the suspension of bonuses.
With cost inflation, a tech sector slowdown and supply chain issues weighing on performance through 2022, the chip maker’s share price closed on 21 December down 44.75% year-to-date.
Manufacturers of computer equipment are facing a build-up of components as consumers reduce their spend in the face of soaring global inflation. Having struggled to produce enough chips to meet demand last year, semiconductor firms now face a collapse in demand.
Micron’s budget for new plants and equipment next year has been cut to between $7bn and $7.5bn, down from the $12bn it invested this year. The company is also cutting executive salaries and suspending bonuses, as well as reducing its workforce by 10% “through a combination of voluntary attrition and personnel reductions,” according to a US Securities and Exchange Commission filing by the company.
Key growth lever
Micron Technology posted a first-quarter (Q1) earnings miss after markets closed on 21 December. Non-GAAP losses of $0.04 per diluted share fell short of the $0.01 per share that analysts polled by Refinitiv had forecast and were a massive decline from $2.16 EPS in the year-ago quarter. Revenue fell 46.9% year-over-year to $4.1bn, 0.5% shy of analyst expectations.
Micron’s finances are being squeezed from two sides. While top-line revenue has collapsed, gross margin fell 75% year-over-year from 3.6bn (46.4% of revenue) to $893m (21.9% of revenue).
Revenue guidance for Q2 has been set at $3.6bn to $4bn, with analysts yielding a consensus estimate of $3.8bn. Micron expects losses for the quarter of between $0.52 and $0.72 per share, well below analyst expectations of a $0.39 loss.
Micron’s share price fell by approximately 2% in after-hours trading on 21 December, and opened on 22 December 2.8% down on the previous day’s close.
Micron’s CEO Sanjay Mehrotra attributed the results to the steep decline in prices as a result of the global oversupply of microchips. “Profitability will be challenged throughout 2023 because of the oversupply that exists in the industry,” he told Bloomberg.
This demand slump is playing out against the backdrop of a tense tussle for control of microchip supply between the US and China. Joe Biden enacted legislation earlier this year that restricted Chinese manufacturers’ access to chip materials produced in America, as well as making it harder for Chinese chipmakers to hire US workers.
Douglas Fuller, an expert on the Chinese chip industry at Copenhagen Business School, called the US’s attempts to impose such restrictions on Chinese chipmakers “a game of whack-a-mole.” Fuller told the Financial Times “whenever Washington comes up with sanctions, there are new projects popping up which they then try to block.”
Fears recently surfaced in the US that Beijing’s next move may be to dramatically ramp up the supply of older chips, flooding global markets with cheaper products and wiping out supply for more advanced chips.
Funds in focus: Invesco Dynamic Semiconductors ETF
Micron is a top-ten holding in the Invesco Dynamic Semiconductors ETF [PSI] with a 4.49% weighting as of 21 December. PSI fell 31.6% year-to-date, with top holding Broadcom [AVGO] falling 12.9% over the same period.
A relative overperformer among semiconductor ETFs is the SPDR S&P Semiconductor ETF [XSD], which fell 28.3% in the year to 21 December. XSD isn’t a pure-play semiconductor ETF, however; its top holding is First Solar Inc [FSLR] with a 3.11% weighting. Micron has a 2.70% weighting as of 21 December.
Refinitiv analysts yield a median 12-month price forecast of $65.00 for Micron, implying a 27% upside on its recent closing price over the coming year. The low estimate of $45.00 implies a fall of 12.1%, while the high target of $100 implies gains of 95.4%.
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