Micron kicks off the down cycle – Chops 2023 capex – Holding inventory off street

-Micron reports weak outlook for fiscal Q4
-2023 capex to be down versus 2022 capex of $12B & Q3’s $2B
-Company keeping inventory off street to support pricing
-Memory is usually the first shoe to drop in a down cycle

Sharp drop in demand at end of Q3…..

Micron reported a sharp drop in demand at the end of its fiscal Q3, which is similar to what we have been hearing and what we reported in recent newsletters. This is a demand side driven imbalance as demand has fallen sharply in the face of supply growth remaining relatively steady. DRAM was 73% of revenues and prices for both DRAM and NAND declined in the quarter. Obviously the industry is bracing for a bit of a storm ahead in the fall.

Holding back inventory

Micron is holding inventory off the street in order to both shore up near term pricing as well as supplement next years product availability while it slows down production rates. This obviously is a strong implication that its current production ramp rate will slow significantly.

Capex was $12.5B in fiscal 2022 – could easily get cut in half

The capex run rate in the just reported Q3 was $2.5B in the quarter or an annual run rate of $10B. We would not at all be surprised to see next years capex cut down to half or less of 2022’s which could be in the range of $6B or $1.5B a quarter or less. The company indicated that its advanced process technology devices were ahead of schedule so they can easily take their foot off the spending gas and coast for a while.

Memory is usually the first to get whacked in a down cycle

We have been suggesting that memory is more consumer centric than other semiconductor parts and as such is more susceptible to declines in consumer spend which is what Micron management was calling out. So it should come as no real big surprise that Micron reported it first. Memory is obviously the ultimate commodity semiconductor product with little to no differentiation despite protests to the contrary.

Samsung will probably echo Micron

We would expect Samsung to repeat what Micron has said as they are in the exact same markets with the exact same products and can’t escape the weakness in demand and pricing. We would hope that Samsung follows Micron and holds product off market to stabilize pricing or things will get very ugly very fast. We would expect a similar slow down in memory capex spend at Samsung but larger in actual dollars as Samsung is a bigger player. Samsung’s spend for logic/foundry should hold up a little better but will likely slow as well

Intel’s warning in line with memory dive

Intel’s warning a few weeks ago was probably in the same timeframe that Micron saw business weaken, likely in similar end markets. We would certainly imagine that this relates to AMD as well. We would certainly be concerned about pricing in the processor market between Intel and AMD as that is already a bone of contention and the fight could worsen if the pie shrinks.

Bigger impact on Semiconductor Equipment

The second order derivative play is that when the chip companies catch a cold the equipment companies get pneumonia. In this case the poster child for memory makers is Lam, followed not too far behind by Applied. KLA is less vulnerable and ASML is more or less immune. Any litho scanners that Micron doesn’t take will likely be snapped up in foundry/logic (at least until that sector rolls over…)

CHIPS for America gets another nail in the coffin

Its a bit hard to argue that the semiconductor industry needs more capacity when demand is falling off and product is being held off the market. If Micron cuts its capex by half, its hard, if not embarrassing for them to hold out their hand for help from the government especially in light of stock buy backs they are doing. It would be a textbook example of “corporate welfare” and why the government shouldn’t help out. It would be throwing gasoline on the fire of excess supply in light of declining demand. While the case can still be made for “on shoring” of chip capacity the argument of shortages just went out the window.

The Stocks

Obviously Micron will get hit as will the broader SOX index especially among the semiconductor equipment companies who could see that declining capex directly. We don’t think this is in any way a Micron specific issue but at the very least a memory market issue that will likely spread. Earnings season could get very ugly indeed as more shoes could drop in the tech and chip sectors

About Semiconductor Advisors LLC
Semiconductor Advisors is an RIA (a Registered Investment Advisor), specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.

Also read:

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CHIPS for America DOA?

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