I generally wish to take a considerably contrarian view of a sure kind of stories. When a company pronounces cutbacks, for instance, it isn’t at all times a nasty factor. Typically it’s prudent administration that permits an organization to get via robust instances and emerge the opposite aspect leaner and stronger. Relying on the timing, it may possibly really be an excellent factor. That’s how I really feel this morning concerning the information that Micron Applied sciences (MU) is chopping round 10% of its workforce and suspending bonus funds, together with different cuts.
My optimistic tackle that information, nevertheless, isn’t one which the market appears to share proper now as MU is buying and selling on this morning’s premarket at about 4% under yesterday’s shut.
That may be a drop that started when Micron launched earnings after the shut yesterday, and it’s onerous to understand how a lot of it’s attributable to the miss these earnings represented and the way a lot to the information of the cutbacks. Final quarter actually wasn’t fairly for the corporate, which posted a much bigger loss than analysts had been anticipating on weak income and, extra importantly, forecast greater losses going ahead.
A drop within the inventory isn’t a shock, however then, the weak quarter itself wasn’t actually a shock both. Micron makes and sells semiconductors, and that’s an trade that has been hit onerous by what’s going on on the planet. The provision issues which can be hitting corporations like Apple (AAPL) in the mean time are due primarily to disruptions in China; if corporations like Apple aren’t making merchandise, then they aren’t ordering chips. That lack of demand can clearly be seen in a chart for the value of DRAM reminiscence thus far this 12 months:
If weak gross sales, weak commodity costs, and a weak backside line had been no shock, why is the inventory reacting so badly? Clearly, the principal cause for that’s as a result of they had been worse than anticipated, but additionally, the cutbacks can have hit the temper of merchants as properly. There’s at all times an inclination to see that as dangerous information piled on dangerous. It exhibits that an organization is resigned to weaker gross sales for a while, however in some methods, that will not grow to be all dangerous.
Markets look ahead, however within the fast aftermath of an announcement like this, they typically punish corporations that do the identical.
For me, I’d slightly personal inventory in an organization the place administration is life like, possibly even a bit pessimistic, about what the longer term holds, versus, say, AMC Leisure (AMC), which tends in the direction of the alternative strategy. Administration at AMC has been portray fairly a rosy image for some time, speaking a few robust return to film theaters and the like whereas updating and renovating properties. Nonetheless, AMC has continued to battle, as evidenced by the announcement this morning of one other capital elevate.
The actions of Micron are in stark distinction to that. Administration there’s proactively getting ready for a downturn; the irony is that their actions and people of others within the trade may very well enhance market circumstances subsequent 12 months. As talked about, semiconductor costs have been beneath strain this 12 months, however that isn’t all about demand. There’s a provide part too, as there’s with any commoditized product, and the overall cutbacks from MU included an enormous discount in proposed capex over the subsequent couple of years. If that’s mirrored by others within the trade, which it in all probability can be, then the availability outlook for chips adjustments and that can be mirrored in value early subsequent 12 months.
One phrase of warning. I’m not leaping in to purchase MU fairly but. The pessimism across the inventory isn’t going away in a rush, and we might see it commerce decrease into the 12 months’s finish, significantly if the market as a complete closes out the 12 months with a bearish tone, however it’s positively one to control within the new 12 months. Administration did what it needed to do in gentle of present circumstances, however that is an trade with a historical past of volatility. Historical past tells us they’ll bounce again strongly earlier than too lengthy. Merchants know that and can be anticipating a bounce properly earlier than it comes, which means that subsequent 12 months might not be as dangerous for MU because the information final night time could make you assume.
* Along with contributing right here, Martin Tillier works as Head of Analysis on the crypto platform SmartFI.
The views and opinions expressed herein are the views and opinions of the creator and don’t essentially replicate these of Nasdaq, Inc.