Will Micron Technology’s $100 billion madness lift the stock out of its misery?

Micron Technology (MU 4.54%) coming out of a terrible trimester. The company’s revenues and profits fell significantly thanks to lower memory chip prices resulting from oversupply in the industry.

Indications from the company indicate that things are about to get worse as memory prices are set to fall further, which could eat away at the chipmaker’s huge pile of cash. That’s why Micron decided to cut capital expenditures by more than 30% in the new fiscal year. But soon after, the company announced a massive investment of up to $100 billion in downtown New York.

The chipmaker plans to spend that money over a 20-year period to build a massive manufacturing plant. Micron says the first phase of this investment – worth $20 billion – could be completed by 2030. Construction of the site is expected to begin in 2024 and production at the new plant is expected to begin ramping up in the second half of the decade.

Investors, however, may wonder why Micron made such an announcement at a time when weak demand for memory chips and excess supply crushed prices and destroyed the company’s bottom line and bottom line. We will have to look at the long-term outlook for the memory market to find the answer to this question.

Micron Technology plays the long game

Declining sales of personal computers and smartphones have weighed heavily on the memory market this year. This is evident in Micron’s fourth quarter fiscal 2022 results (for the three months ended September 1, 2022). The company’s revenue fell 20% year-over-year to $6.6 billion, while adjusted operating profit as a percentage of sales fell 25% from 37 .1% a year ago.

Micron’s forecast for an adjusted gross margin of 26% in the current quarter points to more pain, as it would be a massive drop from the non-GAAP gross margin of 47% in the period of the previous year. Things are unlikely to improve in 2023 as oversupply conditions in the memory market are expected to persist into next year due to weak demand growth.

Still, Micron’s management seems focused on the big picture of the memory market. From the increasing deployment of dynamic random-access memory in smartphones, to the increase in memory content in vehicles, to the increase in artificial intelligence (AI) and machine learning workloads ( ML) in data centers, there are several reasons why the memory demand is expected to grow higher in the long term.

At its 2022 Investor Day, Micron pointed out that the amount of dynamic random-access memory (DRAM) shipped to data centers will double by 2025 compared to last year. NAND flash storage, meanwhile, is expected to triple over the same period. Even better, Micron predicts that the data center memory market (including DRAM and NAND flash memory) will maintain its impressive momentum through 2030, generating nearly $180 billion in revenue versus roughly $60 billion. Last year.

Meanwhile, nascent markets such as high-bandwidth memory are also expected to take off, generating $13 billion in revenue by 2030, up from $1 billion last year. On the other hand, Micron predicts a 30-fold increase in DRAM content and a 100-fold increase in NAND flash content in vehicles as the level of adoption of autonomous driving increases. This explains why the automotive memory market is expected to generate $17.2 billion in annual revenue in 2028 from $3.5 billion last year.

As such, it’s no surprise why Micron is setting itself up for long-term success with an aggressive investment plan that could help it prosper in the long run.

Investors need to be patient

Micron’s $100 billion investment is going to be spread over a long period of time, so the company won’t reap any immediate benefits. In addition, the stock should remain under pressure in the short term thanks to the continued weakness in the memory market. That’s why buying Micron Technology stock might not seem like a good idea right now, even though it’s trading at just seven times earnings.

The forward earnings multiple of 13 shows that the company’s earnings are expected to decline this fiscal year from its fiscal 2022 earnings of $8.35 per share. However, things are expected to improve from FY2024.

UM EPS estimates for the current year given by Y-Charts

And as the long-term outlook indicates, Micron could also see an impressive growth rate beyond the next two years thanks to the secular growth of the memory market. All of this tells us why investors should look for signs of recovery in Micron’s fortunes and start buying this semiconductor stock once the memory market begins to recover.

Chauhan hard has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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