More Proof the Semis are in Trouble: Micron Misses

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Includes: MU, SMH
by: William Trent, CFA

Micron’s (NASDAQ:MU)earnings announcement disappointed investors, sending the shares down sharply after hours. Revenue rose to $1.37 billion, up nearly 9 percent from $1.26 billion a year earlier. Unfortunately, analysts were expecting $1.41 billion.

Sequentially, sales grew 4.7% while inventories ballooned more than 20%. As per the law of supply and demand, when there are too many chips in inventory, prices are going to fall faster than normal. That in turn hurts future sales. This is a drum we have been beating for months, ever since the industry’s orders for chipmaking equipment started indicating future oversupply (see chart.) Unfortunately, Micron’s solution is to make even more chips: the company expects capital expenditures in fiscal 2007 of $4 billion, compared to $1.6 billion in fiscal 2006.

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semi

The problem is industry-wide. So just as Micron wasn’t the first semiconductor company to announce a disappointing quarter, don’t expect it to be the last.

MU 1-yr chart:

MU 1-yr chart

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