-Micron slams on the brakes of capacity & capex-
-But memory market is already over the cliff without skid marks
-It will likely take at least a year to sop up excess capacity
-Collateral impact on Samsung & others even more important
Micron hitting the brakes after memory market already impacts
Micron capped off an otherwise very good year with what appears to be a very bad outlook for the upcoming year. Micron reported revenues of $6.6B and EPS of $1.45 versus the street of $6.6B and $1.30.
However the outlook for the next quarter , Q1 of 2023….not so much. Guidance of $4.25B +-$250M and EPS of 4 cents plus or minus 10 cents, versus street expectations of $5.6B and EPS of $0.64….a huge miss even after numbers had been already cut.
A good old fashioned down cycle
It looks like we will be having a good old fashioned down cycle in which companies get to at or below break even numbers and cut costs quickly to try and stave off red ink.
At least this is the case in the memory business, which is usually the first to see the down cycle and tends to suffer much more as it is largely a commodity market which results in a race to the bottom between competitors trying to win a bigger piece of a reduced pie.
Will foundries and logic follow memory down the rabbit hole?
While we don’t expect as negative a reaction on the logic side of the semi industry, reduced demand will impact pricing of foundry capacity and bring down lead times. There will certainly be a lot more price pressure on CPUs as competitive pricing will heat up quite a bit. TSMC will likely drop pricing to take back overflow business it let go and we will see second tier foundry players suffer more.
The simple reality is that if manufacturers are buying less memory, they are buying less of other semiconductor types, its just that simple.
Technology versus capacity spending
For many, many years we have said that there are two types of spend in the semiconductor industry. Technology spending, in order to keep pushing down the Moore’s law curve and stay competitive. Capacity spending is usually the larger of the two, obviously mostly in an up cycle, in which the next generation of technology is put into high volume production.
Micron is obviously cutting off all capacity related spend and is just spending on keeping up its lead in technology, which they can never stop given that they are in competition with Samsung.
There is obviously some bricks and mortar spending to build the new fab in Idaho that will continue, but will only be filled with equipment and people when the down cycle in memory is over.
Micron did talk about announcing a second new fab in the US but that is likely to be very far behind the Boise fab announced and may never get built within the 5 year CHIPS for America window. The new Boise fab is 3-5 years away and will likely be on the slow side given the current down cycle.
Capex cut in half – We told you so, 3 months ago.
When you are in a hole, stop digging
We are surprised that everyone, including so called analysts, are shocked about the capex cuts. It doesn’t take Elon Musk (a rocket scientist ) to tell you to stop making more memory when there is a glut and prices have collapsed.
Maybe Micron’s comments about holding product off market last quarter should have been a clue and gotten more peoples attention as a warning sign (it got our attention).
Back when Micron reported their last quarter, 3 months ago we said ” We would not at all be surprised to see next years capex cut down to half or less of 2022’s”
Our June 30th Micron note
In case some readers didn’t get the memo we repeated our prediction of a 50% Micron capex cut a month ago “Micron will likely cut capex in half and Intel has already announced a likely slowing of Ohio and other projects”
Our August 30th note
Semi equipment companies more negatively impacted than Micron
When the semiconductor industry sneezes the equipment companies catch a cold
Obviously cutting Micron’s WFE capex in half is a big deal for the equipment companies as their revenues can drop faster than their customers.
While Micron cutting capex in half is a big deal, Samsung following suit with a capex cut would be a disaster. Its not like it hasn’t happened before ….a few years ago Samsung stopped spending for a few quarters virtually overnight.
We are certain Samsung will slow along with Micron, the only question is how much and do they also slow the foundry side of business.
Could China be the wild card in Memory?
While Micron and Samsung and other long term memory makers have behaved more rationally in recent years and moderated their spend to reduce the cyclicality we are more concerned about new entrants, such as China, that want to gain market share. Its unlikely that they will slow their feverish spending as they are not yet full fledged members of the memory cartel.
This will likely extend the down cycle because even if the established memory makers slow, China will not and will likely extend the glut and extend the down cycle.
Technology will help protect Micron in the down cycle
As long as Micron keeps up its technology spend & R&D spend to stay ahead of the pack or at least with the pack they will be fine in the longer run when we come out of the other side of the down cycle.
Micron has a very long history about being very good spenders and very good at technology and if they keep that up they will be fine. We highly doubt they will do anything stupid.
We see no reason to buy Micron any time soon at near current levels.
As we have said recently, we would avoid value traps like the plague.
Semi equipment stocks should see a more negative reaction as they are the ones to see the negative impact of the capex cuts.
Lam , LRCX, is obviously the poster child for the memory industry equipment suppliers and is a big supplier to Micron and more importantly Samsung
We also see no reason to go near Samsung and Samsung may be a short as investors may not fully understand the linkage to the weakness in the memory industry. Semiconductors are the life blood of Samsung and memory is their wheelhouse whereas foundry is their foster child.
We warned people months ago “to buckle up, this could get ugly” and so it continues.
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.
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