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Micron's (MU +3%) gloomy forecast of slowing demand throughout the semiconductor industry finally materialized yesterday in the form of a sales miss in Q4 (Aug) and dismal Q1 (Nov) guidance. Furthermore, MU plans to cut back supply, reducing its CapEx by 30% yr/yr in FY23, with a 50% reduction in wafer fab equipment CapEx.

However, on the flip side, MU's warnings over the past few months set realistic expectations for investors leading into its Q4 earnings report. Starting with guiding Q4 revs well below consensus in late June, MU already saw noticeable signs of the industry entering a down cycle. Then, early last month, MU grew even more bearish, cautioning that Q4 revs would likely land at or below the low end of its prior outlook. Meanwhile, chip suppliers like Advanced Micro (AMD), NVIDIA (NVDA), and Intel (INTC), as well as others in the memory space, like Seagate Tech (STX) and Western Digital (WDC), delivered either lackluster earn2ings reports or weak guidance. As a result, investors priced in plenty of negativity, explaining why shares of MU are holding up relatively well today.

• In Q4, MU met its prior earnings guidance despite the figure falling 40.1% yr/yr to $1.45. Revs falling 19.7% yr/yr to $6.64 bln was a weak point since it missed MU's expectations of $6.8-7.6 bln. However, given MU's caution last month, the sizeable miss was not a major surprise.
• Outside of automotive, all of MU's end markets experienced sales declines yr/yr in the quarter. However, there were a few encouraging remarks, including an anticipated bright second half for automotive, strong long-term fundamentals in industrial IoT, and healthy cloud end market demand. Still, many bearish comments tempered these developments, including ongoing supply constraints in automotive and cloud, as well as deteriorating client and memory end market demand.
• The usual headwinds were at play in Q4, including COVID-related lockdowns in China, a war in Ukraine, and elevated inflation.
• Looking ahead, the demand backdrop is not shaping up to turn around rapidly. A significant culprit affecting the memory and storage industry is ongoing inventory adjustment at customers across all end markets, which will cause supply growth to be meaningfully higher than demand for the remainder of CY22.
• As a result, MU is expecting a rough quarter ahead, predicting adjusted EPS of $(0.06)-$0.14 and revs of just $4.0-4.5 bln, both considerably below consensus. Furthermore, MU is slashing its CapEx for FY23. However, MU believes that despite the adverse impact this will have on its FY23 costs, it is a necessary step to bring its supply down closer to industry demand.
  • On a side note, MU's move will likely hurt wafer fab equipment suppliers like Lam Research (LRCX), ASML (ASML), and KLA Corp (KLAC).

Bottom line, MU may have posted a weak earnings report in Q4. Still, investors appreciate its approach to reducing supply to avoid an even worse inventory imbalance. Although this will sting in the coming quarters, it may prove to be the correct strategy over the long term.