Semiconductor stocks tend to be cyclical in nature. Although they are the backbone of technology, chips go through major cycles alongside the economy and demand for electronics.

With inflation continuing to rise, it is no surprise that many semiconductor companies such as Micron Technology (MU Quick QuoteMU - Free Report) , Intel (INTC Quick QuoteINTC - Free Report) and Advanced Micro Devices (AMD Quick QuoteAMD - Free Report) have all seen their stocks be crushed by weakening consumer demand. Consumers are reluctant to spend on technology products during high inflationary periods.

Micron is one of the largest makers of memory chips in the world, with its offerings in PCs, smartphones, and other devises. Micron is also expanding into other areas like data centers, electric and connected vehicles, 5G, artificial intelligence, and more. Trading 50% off its highs, it will be important to see Micron’s demand outlook for semiconductor memory solutions.

Micron stated last quarter that industry demand had weakened, but CEO Sanjay Mehrotra said he was taking actions to moderate supply growth in fiscal 2023. Mehrotra went on to say that long-term secular demand for memory and storage are well positioned to deliver strong cross-cycle financial performance.

Performance

Micron stock is down -46% year to date. Despite the large decline over the last year, Micron shares are up a respectable +33% in the past five years with the benchmark at +51%. Micron has also outperformed the Semi-Memory Market over this time span with its Zacks Subindustry at +28%.

Micron has also posted positive earnings surprises for 10 consecutive quarters.

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Outlook

The Zacks Consensus Estimate for MU’s fiscal Q4 earnings is $1.45 per share, which would represent a considerable -40% decrease from Q4 2021. Sales for Q4 are also expected to decline 16% at $6.92 billion. Estimates for the period have continued trending down over the past two months, with full year earnings estimates for this year and FY23 trending down as well.

Year over year, MU is projected to post 37% earnings growth in 2022, but FY23 earnings are expected to decline -46%. Top line growth is expected to be up 12% in FY22 but decline -15% in FY23 to $26.18 billion.

Despite the trend of beatings earnings expectations, Micron shares have stayed submerged in volatility with the company’s mention of weakening demand being noted by investors during MU’s fiscal third quarter. The current quarter will be no different and the company’s guidance will be more closely monitored than usual under uncertain economic conditions.

Valuation

Currently trading around $50 a share, MU has a forward P/E of 10.8X. This is much lower than its high over the last five years of 29.8X and near the median of 8.1X.

Despite Micron’s forward P/E indicating the company trades at a discount relative to its past, the uncertain economic environment, particularly for technology stocks has seen MU’s estimate revisions continue to decline.

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Bottom Line

Rising inflation has severely impacted the demand for chips in regard to the business outlook for new products and expansion for semiconductor memory technology. MU currently lands a Zacks Rank #5 (Strong Sell) in correlation to current chip demand and downward earnings estimate revisions.

Perhaps an earnings beat, and more importantly, better than expected FY23 guidance could help get MU stock back on track.