Dutch semiconductor bellwether ASML (ASML +5.07%) sent a dire warning to the semiconductor industry when it released its third-quarter 2023 results on Wednesday.
The company, which is known for providing critical semiconductor manufacturing equipment and holds a monopoly-like position in the extreme ultraviolet (EUV) lithography market, saw a sharp decline in bookings and issued a tepid forecast for 2024. ASML anticipates 2023 sales to increase by 30%. However, management is worried that a sharp slowdown in the demand for its semiconductor equipment next year could scupper its growth trajectory.
NASDAQ: ASML
Key Data Points
ASML forecasts flat revenue in 2024, pointing out that "customers continue to be uncertain about the shape of the demand recovery in the industry." What's worse is that the slowdown in demand for ASML's chipmaking equipment seems to have set in already. The company posted net bookings worth 2.6 billion euros last quarter.
That was way below analysts' expectations of 4.5 billion euros in bookings, and represents a huge drop from the 9 billion euros' worth of net bookings ASML posted in the third quarter of 2022. According to ASML, net bookings refer to "all system sales orders for which written authorizations have been accepted."
While these numbers don't paint a good picture of the future of the semiconductor industry, they could turn out to be a positive for Micron Technology (MU +5.00%). Let's see why that may be the case.
Lower semiconductor equipment spending could be a boon for Micron Technology
Micron Technology is known for manufacturing memory chips. The company's dynamic random access memory (DRAM) and NAND flash storage chips are deployed in multiple end markets such as data centers, personal computers, smartphones, and automotive.
However, the company got hammered badly over the past year thanks to an oversupply in the memory market. The weakness in memory demand combined with higher supply dented memory prices big time. This explains why Micron's revenue in fiscal 2023 (which ended on Aug. 31, 2023) was cut in half from the previous year to $15.5 billion.
The memory specialist swung to a loss of $4.45 per share from a profit of $8.35 per share in fiscal 2022 as margins collapsed on account of weak memory prices. However, Citi Research (a division of Citigroup) analyst Christopher Danely estimates that memory prices have started recovering. Danely reiterated his buy rating on Micron and has a $85 price target on the stock, which points toward a 23% jump from current levels.
The analyst estimates that the production cuts by memory suppliers will lead to a price recovery. He expects the price of memory chips to increase 10% year over year in the fourth quarter, followed by a solid rally of 32% in 2024. This should allow Micron to return to profitability over the next few quarters.
NASDAQ: MU
Key Data Points
Industry association SEMI estimates that spending on memory equipment could decline by 46% in 2023. However, it also points out that memory spending could accelerate 65% in 2024. But then, ASML's forecast suggests that memory manufacturers could continue to cut back on production in 2024. For example, Micron management remarked on the company's latest earnings conference call that it plans to reduce its capital expenditure in fiscal 2024 compared to last year.
Given that Micron is one of ASML's customers, it is not surprising to see that the latter witnessed a sharp decline in its bookings last quarter. Other companies in the memory industry have also been reducing their capacity investments. The good part is that the reduced supply is likely to coincide with an improvement in demand, driven by new catalysts such as artificial intelligence (AI), a potential turnaround in the PC market, and a rebound in smartphone sales.
Market research firm Gartner estimates that these factors could lead to a 70% jump in the memory industry's revenue next year to $92 billion. For comparison, the market is set to contract a whopping 35% this year.
Micron's forecast points toward better times
Micron is coming off a terrible fiscal 2023. However, the company's revenue forecast of $4.4 billion for the first quarter of fiscal 2024 suggests that its top line could jump more than 7% year over year. Even better, analysts anticipate massive jumps in the company's top and bottom lines in the next three fiscal years.
|
Fiscal Year |
Estimated Revenue |
Growth (YOY) |
Estimated EPS |
|---|---|---|---|
|
2024 |
$21 billion |
35% |
($1.56) |
|
2025 |
$30 billion |
44% |
$5.44 |
|
2026 |
$33 billion |
10% |
$6.99 |
Source: YCharts. YOY = Year over year. EPS = Earnings per share. Note: Fiscal year ends Aug. 31.
Micron's stock price has shot up 38% this year already, and investors would do well to buy this semiconductor stock before it is too late. It seems set for more upside thanks to a turnaround in the memory market and ASML's latest forecast, which supports the theory of a potential price recovery.
