Micron earnings overshadowed by grim outlook for the company

Yahoo Finance Live anchors discuss third-quarter earnings for Micron.

Video transcript

- Let's also take a look at Micron shares here this morning. They are getting short circuited after a grim outlook overshadowed the company's quarterly earnings beat here. Now, the company cited weakness in China and a pullback in chip demand impacting some of their near-term revenues for the company in Micron. We'll be taking a look at the stock here. And you're seeing that down by about 4% here pre-market. And most notably for the chip sector as well, it comes to not just devices, but also in the data center.

And that's where you're going to see some of that continued spending, at least right now. It's just, at what volume of spending will you see companies continue to spend into their data center, into all the infrastructural dollars that they've placed into applications, connectivity, and all the collaboration that they need between those applications for their employees and for their operations?

- Short circuit. Good way to put it. Hat tip to whoever wrote that one. But look, I'm looking at the guidance here from Micron. In terms of sales, $6.8 billion to $7.6 billion. That's their outlook. The Street was at $9.18 billion. That is a significant warning. The midpoint of their fourth quarter earnings outlook-- $1.43 to $1.83, well below the Street's estimates of $2.60.

So they hit a lot of negative and a lot of concerns in that earnings call. They mentioned high inventories at cloud customers. They reduced their outlook for 5G smartphones. Warned about a PC slowdown. And so this is not just a Micron thing. Is it going to impact AMD? It probably is. Is it impacting Nvidia? It probably is. It impacting companies like a Hewlett-Packard or Dell? Probably is. So what are those colors going to look like?

- It does make different kinds of chips than those companies, to be clear. Micron is a memory chip maker and mostly competes directly with the South Korean chip makers. That said, all of those chips go into the same stuff.

- Just like General Motors cars, right?

- No, they go in there too. They go in there too. But when you're looking at the semiconductor business, remember always that it is a commodity business. And, traditionally, the business has been beset by very sharp cycles. And Micron and many of the chip makers in fact tend to be late in these cycles. And so a glut builds up.

So what Micron appears to be trying to do this time around is not get behind it, not get stuck with the glut of chips. And so that is why they seem to be cutting really aggressive the production targets, ordering new equipment, for example. So it seems like, a la Target, in a very different industry, that they're trying to sort get out ahead of this, be nimble, and react very dramatically to what they see as an impending slowdown instead of getting caught behind and ending up with a glut.

And to your point, it comes back to who's doing chip designing versus chip fabrication. And that process is still waiting to come online, especially here in the US, with some of the companies, even as we were talking to Qualcomm CFO earlier this week, it sounds like many of them were banking much of this production coming online and the capacity coming online to the Chips Act, which is still hung up right now in Washington, DC.

- No. That's a very good point. I'll even note this too. If you go into the Yahoo Finance platform and you look at the stats or the valuation multiples that Micron's trading at, five times for earnings. Now, on a relative basis, that's well below the market multiple. Perhaps your first thought is this is a cheap stock. But when you hear a company out here warning this significantly about margins, profits, and sales, you will quickly realize that cheap may not be cheap enough.