Micron Technology: Spend Spend Spend Suffer
Micron Technology reports next week and has had some price targets cuts, which I explain the reasoning in this article.
Micron Technology and other memory chip manufacturers produced at high levels, leading to an overall market surplus and elevated inventories.
Micron anticipated a stronger demand recovery post-pandemic, which did not materialize, resulting in excess inventory.
Post-pandemic, demand for PCs, smartphones, and other consumer electronics softened, leading to an oversupply of memory chips.
Global supply chain issues slowed the ability to adjust production rates quickly, exacerbating the inventory buildup.
Consumers are holding onto their devices longer, reducing the demand for upgrades and leading to higher stock levels.
Micron Technology: Suffer Because of High Capex Spend
Micron Technology (MU), a dominant player in the semiconductor memory industry, has faced notable challenges recently due to excessive capital expenditures (Capex) and growing inventory levels. The company’s strategic decisions to expand production in anticipation of high demand left it struggling when market conditions shifted. By analyzing consumer demand for electronics, Micron’s Capex trends, and the rising inventory levels, we can gain a clearer understanding of the company’s current situation and what it means for investors.
Memory companies spent huge amounts of money in 2020 and 2021 on WFE, ignoring my thesis several years earlier (in numerous publications) that a memory crash was coming in 2019 due to large capex/WFE spend, which it did. As soon as the bloodshed stopped, they started buying more chip equipment (WFE) again. Now memory companies are suffering again.
In addition, poor fiscal policy leading to high inflation that resulted in Fed tightening exacerbated the oversupply by decreasing demand. I had warned this would start in 2023, but the problem was pulled in by six months because of the dour economy.
Semiconductor inventories remain high, especially in end markets with declining demand (automotive and smartphones). Thus, memory growth through 2024 will be uneven with PCs and Industrial recovering first.
But a total reduction in inventory will occur when demand for chips is greater than supply, and that will be dependent on macroeconomic factors. As these macro headwinds dissipate, chip oversupply will drop as demand for gadgets containing chips is satisfied.
Consumer Demand Trends from 2020 to 2024
Consumer demand is one of the most critical drivers for memory chipmakers like Micron. Memory chips, including DRAM and NAND, are used in a variety of consumer electronics, and fluctuations in demand for these products directly impact Micron’s sales and production output. Table 1 shows Demand for Consumer Products by Product Type between 2020 and 2024 (Q2).
The PC market, for example, saw steady growth during the pandemic, peaking in 2021 due to increased demand for work-from-home setups. However, as the pandemic subsided, demand softened, and by Q4 2022, PC sales had decreased to $84 billion. Similar trends can be seen in the smartphone market, where demand surged during the pandemic but declined by 2022 and 2023, leading to excess inventory and weaker sales.
Wearables and gaming consoles also experienced fluctuations. Despite wearables maintaining consistent growth, gaming console sales tapered off after peaking in 2021. These dynamics have had a direct impact on Micron’s ability to forecast production, contributing to its growing inventory problem.
Rising Inventory Levels: A Major Pain Point
One of Micron’s key issues has been its inability to align production with demand, leading to growing inventory levels. The high inventory is a direct result of overproduction during the pandemic-induced demand surge, followed by weakened demand across key product categories such as PCs and smartphones. Table 2 shows Days of Inventory for Memory Chips.
