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Micron's Earnings Reveal Dismal Outlook for Semiconductor Market

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Micron Technology Inc. (NASDAQ:MU) released earnings results for its third quarter of fiscal 2022 on Thursday after the market closed. Investors have been looking forward to the report because Microns May-ending quarter provides an extra month of data about the semiconductor market, which is experiencing a period of volatility.

We last got an update on the market from Nvidia (NVDA) for its April-ending quarter, which revealed negative effects from the Covid-related factory shutdowns in China as well as the war in Ukraine. In addition to these macro factors, analysts have also been noting signs that semiconductors were overbought in 2021 as companies sought to hoard them amid the fear of shortages.

On the positive side, Micron beat analysts estimates on both its top and bottom lines for the quarter. However, its outlook has investors concerned that near-term pain could be in the cards, not just for Micron but for the semiconductor industry as a whole.

The numbers

Analysts polled by FactSet had called for Micron to deliver adjusted earnings per share of $2.43 on revenue of $8.64 billion for the quarter. Micron surprised to the upside with adjusted earnings per share of $2.59 and revenue of $8.64 billion.

These numbers also compared favorably to earnings per share of just $1.88 and revenue of $7.42 billion in the year-ago quarter.

Operating cash flow was $3.84 billion versus $3.63 billion for the prior quarter and $3.56 billion for the same quarter of fiscal 2021.

The gross margin was 46.7% and the operating margin was 36.4%, both of which marked improvements of approximately 5% compared to a year ago.

Worrying outlook

Despite the positive news for the quarter ending in May, Microns outlook for its next quarter was lower than analysts were expecting. The stock initially dipped in after-hours trading, though it soon recovered to near closing levels.

For its fourth quarter of fiscal 2022, Micron calls for revenue of $7.2 billion, plus or minus $400 million. Even at the top end of this estimate, it falls far below the $9.05 billion that analysts had been hoping to see, and it would mark a year-over-year decline from the companys revenue of $8.2 billion in the fourth quarter of fiscal 2021.

The company anticipates adjusted earnings per share of $1.63, plus or minus 20 cents. Analysts surveyed by Yahoo Finance have an average estimate of $2.62 for adjusted earnings per share, and the figure for the corresponding quarter of fiscal 2021 was $2.39.

Micron noted in its earnings presentation that near the end of the fiscal third quarter, it saw a significant reduction in near-term industry bit demand, mostly from weakness in consumer markets, including PC and smartphone.

President and CEO Sanjay Mehrotra noted weakening demand in the short term, but remained confident in long-term demand:

Recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth in fiscal 2023. We are confident about the long-term secular demand for memory and storage and are well positioned to deliver strong cross-cycle financial performance.

What this means for the industry

Micron is facing double headwinds from the consumer demand side as well as the inventory side, both of which the chipmaker expects to negatively impact its fiscal fourth-quarter results.

This reflects analysts growing worries that, in addition to the war in Ukraine extending supply chain issues that were previously hoped to be resolved with the winding down of Chinas Covid-19 protection policies, the semiconductor industry will also face pain from companies rushing to overstock on fears of shortages, much like a tech industry equivalent of the great toilet paper rush at the beginning of the pandemic. Now that they have excess, demand from customers can be expected to decrease in the coming months.

Another factor to consider is venture capital flows to tech startups are dwindling due to high inflation, rising interest rates and fears of recession. Many job seekers in the tech industry are reporting their jobs are being cut either soon after they start or before they even begin work due to funding being pulled. This implies demand reduction from the enterprise side.

Overall, though, Micron seems most concerned about the weakening of consumer purchasing power, as it honed in on this subject in its earnings presentation.

These are unlikely to be issues that are unique to Micron, so investors can likely expect the industry downturn to continue for some months before beginning to recover.

This article first appeared on GuruFocus.