2023 Week 12: Same Old Same Old

Micron suffering from high inventories; Deutsche Bank targetted by short sellers; Inflation showing some signs of cooldown

Apr 06, 2023

💡Did you know? Nescafe, the popular coffee brand from Nestle served as a staple drink for the military in the United States, during the World War II

📈 Market Rundown

Micron: Plagued With Inventory Issues

📝 Quick Recap

Micron, memory chips manufacturer, reported an earnings miss for this quarter (EPS of -$1.91 vs $0.88). As a result, its shares tumbled by 2%.

Memory chipmaker Micron expects revenue drop, expects AI to boost sales in 2025 | Reuters — Source: Reuters

🧐Analyze like a consultant

The decline in revenue is the major driver behind Micron’s overall profits this quarter.

So, why has revenue declined?

In response to potential supply chain disruptions and increased demand for electronics (thanks to the pandemic), Micron and other chip manufacturers had built up a large inventory of NAND and DRAM chips. However, as consumers and businesses scale back their purchases, the markets for these chips are currently experiencing an oversupply. As a result of the oversupply, the prices and volume of chips sold have declined across the market, negatively impacting revenues for chip manufacturers.

How can Micron recover?

Micron's revenue is influenced by the cyclical nature of the chip market, which mirrors the broader economy. Given this macroeconomic environment, Micron has limited options for revenue recovery beyond waiting for the market to improve. Management is optimistic that the market will recover in the second half of 2023, citing potential lower inflation and supply chain recovery by the end of the year.

Although Micron has no control over the broader economy, it can still take action to address the current situation. Management is actively working to reduce the company's overall cost base, including a reduction in production this quarter and planned capex. While underutilization negatively impacts the economy of scale and increases the cost per unit of chips produced, reducing production is the easiest short-term solution to Micron's problems.

We're at levels now that none of us have seen before on underutilization at Micron and maybe in the company's history. So it's a significant reduction.
I'll add that we do, as you know, build principally to WIP. So we're able to then finish those products later and minimize the amount of build. — Mark Murphy, Micron’s CFO

Additionally, Micron should take this opportunity to evaluate the long-term trends in the overall NAND and DRAM market and plan its future R&D and production plans accordingly. This way, the firm can gain a competitive advantage when the market recovers in 2024 and beyond.

🤷‍♂️What does it mean for investors?

Wait and observe. Investors should closely monitor Micron's inventory levels, inventory write-downs, and gross margins in the short term. In the long term, they should pay attention to the company's efforts to address upcoming demand for technologies such as AI and its confidence in driving this change.

Deutsche Bank: The Next Target

📝Quick Recap

Markets spooked by Deutsche Bank — Source: Bangkok Post

Following the recent Credit Suisse collapse, Deutsche Bank is under threat as panicked investors continue to scour for weak spots in the financial system. The bank’s stock tumbled ~9% last week as investors continue to build credit default swaps, a form of insurance for the company’s bondholders against its default.

However, there is confusion among some analysts and investors as to why Deutsche Bank was bearing the majority of the market's ire. In fact, last year, Deutsche Bank has been the most profitable since the 2007 financial crisis and has solvency and liquidity ratios well above its requirements. In other words, there is no reason to panic. This incident indicates an overly pessimistic market sentiment — Investors are worried about future bank collapses, and hedging accordingly. Hopefully, this pessimistic market sentiment improves as we head into the second half of 2023.

Inflation: Showing Some Signs Of Cooldown

📝Qucik Recap:

An inflation gauge the Federal Reserve follows rose slightly less than anticipated in February, providing some hope that interest rate hikes are helping ease price increases. On a 12-month basis, core PCE increased by 4.6%, a slight deceleration from the level in January.

Still, inflation is likely to remain well above the Fed's 2% target into 2024, and officials have said they remain focused on bringing down prices despite the current bank turmoil.

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