Micron Technology (MU) shares fell as much as nearly 6% during Friday’s session, following the memory chip maker’s release of its much-anticipated earnings report after Thursday’s closing bell. Those fiscal third quarter results beat estimates on per-share earnings and revenue but came alongside weaker-than-expected guidance for its current quarter. It’s worth noting that Micron shares were able to cut in roughly half their earlier declines by the close. Here’s what Micron’s quarterly numbers and forward guidance say about the semiconductor industry right now — and, by extension, the Investing Club’s four chip stocks: Nvidia (NVDA), Qualcomm (QCOM), Advanced Micro Devices (AMD) and Marvell Technology (MRVL). Some context … As we’ve written before, not all semiconductor companies are created equal — the chips they design and make serve different functions across the vast processing landscape and go into different types of products. In Micron’s case, its memory memory chips fall within two main categories: DRAM, dynamic random access memory), which temporarily stores data — and NAND flash, which offers long-term information storage because they don’t need continuous power to operate. Our focus here is Micron’s results in its end markets because that’s where we can get read-throughs into the chip companies in Jim Cramer’s Charitable Trust, which we use for the Club portfolio. Smartphones This is one of Micron’s two big consumer markets (the other is personal computers, more on that soon). In its fiscal third-quarter, Micron saw a year-over-year decline in mobile revenue. The company’s CEO, Sanjay Mehrotra, offered this industry outlook on the earnings call: “Smartphone unit sales expectations have declined meaningfully for calendar 2022. We are now projecting smartphone unit volume to decline by mid-single-digits percent range year-over-year in calendar 2022, well below the industry and customer expectation earlier in the year of mid-single-digit percentage growth.” Of our chip stocks, Qualcomm is the one most tied to smartphones. Even though Qualcomm is working on diversifying its revenue streams, which is part of our investment thesis in the company, handsets remains its single largest end market for chips by sales. While it is notable that Micron expects a decline in smartphone sales in 2022, it’s important to note that a slowdown was already conventional wisdom on Wall Street after Covid-fueled purchases of consumer electronics for working at home. It’s a major reason why Qualcomm shares were already down roughly 30% year to date, as of Thursday’s close. The stock fell more than 3% on Friday. The question really is how much of the industry decline has been priced into Qualcomm shares at this point. The stock is trading at less than 10 times forward earnings , suggesting the “E” needs to come down but the question is by how much? As Bernstein analyst Stacy Rasgon highlighted in a CNBC interview Friday, that is well below its lows in the years preceding the pandemic. Excluding 2022, Qualcomm’s lowest P/E ratio in the past five years came during the March 2020 sell-off, according to a CNBC analysis of FactSet data. That trough was recorded on March 20, 2020, when QCOM shares traded at 12.16 times forward earnings. Fears of the smartphone slowdown is the reason investors have not wanted to touch Qualcomm, Rasgon acknowledged. However, he contended, “they actually have a little less exposure to some of those areas that are weak.” PCs Personal computers is Micron’s other main consumer end market. Just like smartphones, Micron sees sales falling on a year-over-year basis. Here’s Micron’s CEO on the industry outlook for PCs: “A number of factors have impacted consumer PC demand in various geographies. As a consequence, our forecast for calendar 2022 PC unit sales is now expected to decline by nearly 10% year over year from the very strong unit sales in calendar 2021. This compares to an industry and customer forecast of roughly flat calendar 2022 PC unit sales at the start of this calendar year.” Also important: Micron saw “a significant reduction in near-term industry bit demand” toward the end of Q3, Mehrotra said, mostly related to mobile and PC. Micron’s third quarter ended June 2. Of our chip names, this commentary is mostly relevant to AMD, which makes processors and graphics chips (GPUs) that go into both desktop computers and laptops. (Data center is a key market for AMD, too. More on that later). But just like with Qualcomm and smartphones, it’s become clear in recent months that the market is concerned about a slump in PC sales and some investors have been dumping AMD shares accordingly. The stock was down over 45% year to date as of Thursday’s close, and was in the red again Friday by more than 3%. It is similarly a question of just how much of the bad news is already reflected in AMD shares. One thing to note is just a few weeks ago, in early June, AMD management reaffirmed its full-year 2022 revenue guidance of 60% growth. During an Investor Day call with analysts, CEO Lisa Su said outright that she expects 2022 to be a “down-PC market,” acknowledging there needs to be some giveback after the pandemic boosted sales for two years. Another thing: AMD has, in recent years, shifted its focus within the PC market to higher-performance computers that appeal more to corporations and gamers than the average person buying a new unit to use at home. It’s a strategy that has helped AMD expand its market share, Su told CNBC earlier this year . Plus, the lower end of the PC market is generally thought to see softer demand before the high-end pocket experiences it. Data center/cloud Although its overall guidance was lighter-than-expected, Micron expressed confidence in its data center business. Here is Mehrotra on the call: “Data center fiscal Q3 revenue grew by double-digit percentage sequentially and well over 50% year-over-year. Data center end demand is expected to remain strong in the second half of calendar 2022, driven by robust cloud CapEx growth. Despite the strong end demand, we are seeing some enterprise OEM [original equipment manufacturer] customers wanting to pair back their memory and storage inventory due to non-memory component shortages and macroeconomic concerns.” AMD, Nvidia and Marvell are all big players in the data center market, so this aspect of Micron’s quarter and forward commentary is particularly of interest. To illustrate why: In Marvell’s quarter ended April 30, data center accounted for about 44% of its revenue. Marvell generally has the least consumer exposure of all our chip stocks. In Nvidia’ quarter ended May 1, data center overtook gaming as its largest revenue segment for the first time in nearly two years . AMD’s data center sales are included within its Computing and Graphics segment, which similarly was its biggest revenue segment. Su also has often identified data center as AMD’s most important market for growth, which is why it expanded its presence in the industry through the acquisitions of Xilinx and Pensando. At the company’s recent Investor Day, management said its data center business represents $125 billion of AMD’s roughly $300 billion total addressable market in the next five years. As Mehrotra noted above, there are some broader economic worries and questions about how recession concerns will factor into enterprise spending. At the same time, it’s crucial to remember the growth of data center and cloud computing is a secular trend that is playing out over many years, not just a few quarters. Our investment in this trio of chip stocks (again, AMD, Nvidia and Marvell) reflects our belief in that long-term trend, and it’s why we’ve stuck by them after aggressively selling each position in April despite this year’s considerable declines. It’s also why Bank of America analysts earlier this week lowered their sales and earnings estimates for Nvidia, AMD and Marvell — yet still kept buy ratings on all three stocks . (Jim Cramer’s Charitable Trust is long AMD, NVDA, MRVL and QCOM . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
