As the fourth-largest semiconductor company in the world, Micron Technology Inc. (MU, Financial) is a leader in DRAM (dynamic random access memory) and NAND (flash memory). Both are essential components of all computers, from your laptop to smartphones and even your connected vehicle.
The business is facing challenges as the semiconductor industry is dealing with a supply glut after a shortage in 2021. Regardless, Micron’s market position has remained steady and management has aggressively slashed costs. 
Understanding Micron's cyclical financials
On Wednesday, Micron reported mixed financial results for the fourth quarter of fiscal 2023. Its revenue of $4 billion was down an eye-watering 40% year over year, but was mainly driven by the macro pullback in the semiconductor industry and is not an issue that is solely impacting this business.
Its revenue rose by 7% quarter over quarter, which could be an indication of a turnaround.
Performance of key segments
Its DRAM segment contributed to 69% of revenue and rose by 3% quarter over quarter. Bit shipments rose to the mid-teens percentage range, while prices declined by single digits due to the excess in the industry.
Micron is expected to begin the production of its HBM3E (high bandwidth memory) in early fiscal year 2024 and drive “meaningful revenue” by the end of the year. A huge upside could be driven by an Nvidia (NVDA, Financial) compute deal, which the company is at the qualification stage for.
The company is in a solid position to transition to the higher capacity D5 memory standard and expects revenue from this product range in the second quarter of 2024, driven by artificial intelligence.
Its NAND (flash memory) revenue was $1.2 billion, which contributed to 30% of the company’s total revenue. This rose by 19% quarter over quarter, driven by a strong (40%) uptick in bit shipments. However, for the full year, NAND revenue is still down 46% at $4.2 billion.
Its latest 176 layer and 256 layer NAND is in production, and the company has already shipped samples to selected customers. The company believes data-intensive AI applications will cause a huge increase in demand. According to industry assessments (cited by Micron Technology), its revenue share for data centers SSDs hit a record high in the quarter.
Further, its Compute and Networking business unit revenue was $1.2 billion, down 14% quarter over quarter. PC unit volume declined by low double-digit percentages, driven by the cyclical pullback in the industry. However, the business has forecasted an increase in the calendar year of 2024, driven by AI-enabled PCs.
Micron launched three new products for PC gamers and professional content creators during the quarter, which should help to drive growth as demand increases.
Its Mobile business unit revenue was up 48% quarter over quarter to $1.2 billion, which was very strong.
Mid-single-digit growth is expected in calendar year 2024, driven by a mix toward premium phones with greater memory capacity. According to the company, a third of smartphones today have a minimum of 8 gigabytes of DRAM and 256 GB of NAND, up 7% year over year. This is expected to increase with AI content and the metaverse.
Embedded segment revenue was $860 million, down 6% quarter over quarter. This was driven by seasonality adjustments in the automotive industry. Revenue for the Storage business unit was $739 million, up 18% quarter over quarter.
Reviewing margins, cash flow and balance sheet
Micron reported a gross margin of -9%, which was an improvement of 7% quarter over quarter. This was impacted by lower pricing and underutilization costs, though the sell through of discounted inventory did provide a slight boost.
Its operating expenses were $842 million, down $24 million quarter over quarter.
The operating loss was $1.2 billion with a -30% margin reported. The company recorded a tax benefit of $14 million, which added a boost to this number.
Moving on to cash flows, $1.6 billion in cash from operations was generated, contributing to 10% of the total. Capital expenditures were $1 billion for the quarter and $7 billion for the year. Its free cash flow generated a loss of $758 million.
Micron has a strong balance sheet with $10.5 billion in cash and investments and $13 billion in total liquidity. Total debt of $13.3 billion with low net leverage was also reported.
A tepid outlook
Looking ahead to the first quarter of 2024, Micron is expecting $4.4 billion in revenue, slightly higher than the $4 billion reported in the fourth quarter of 2023. Its operating expenses are projected to be approximately $900 million with an earnings per share loss of $1.07.
Is Micron overvalued?
Micron Technology trades with a price-sales ratio of 4.1, which is higher than historic levels.
But more importantly, its price-earnings ratio is 14.6, which is lower than historic levels.
The GF Value Line, however, indicates the stock is significantly overvalued based on historical ratios, past financial performance and analysts future earnings projections. I believe this is likely due to the cyclical pullback in revenue and earnings. Therefore, this valuation may not be fully valid.
Concluding thoughts
Micron Technology is a tremendous company and true leader in both DRAM and NAND. These are essential components of all computers, phones and data centers. Therefore, despite the tough macroeconomic environment, I expect demand to rebound in the long term.
