Micron Earnings Preview- Investors watch for signals on the semiconductor industry

Micron Technology (MU) is set to report its Q4 earnings after the market close, with the results expected to be released shortly after the bell, followed by an earnings call at 4:30 p.m. ET. According to FactSet consensus estimates, analysts anticipate the company to report earnings per share (EPS) of $1.11 and revenue of $7.65 billion for the quarter. As investors brace for the results, all eyes will be on the company's guidance, especially after mixed signals from the broader semiconductor industry and concerns about its core markets—smartphones and PCs.

Over the past few months, Micron's stock has stabilized after a sharp decline of more than 40% from its record highs in mid-June. The downturn was largely driven by fears of weakening demand in Micron's core DRAM market, particularly for non-AI related products like smartphones and PCs. These concerns were underscored when Broadcom (AVGO) issued disappointing Q4 revenue guidance earlier this month, pointing to softness in non-AI segments, although AI demand remained strong. Micron's ability to meet or exceed the relatively subdued expectations set for Q4 could be crucial in determining the direction of its stock.

One of the critical metrics to watch in Micron's Q4 report will be its performance in the AI-driven segments, particularly its high-bandwidth memory (HBM) chips. Last quarter, Micron generated over $100 million in HBM3 revenue and expects to see several hundred million dollars in HBM revenue for the full fiscal year, with a substantial increase to multiple billions in fiscal 2025. However, while AI remains a growth area, Micron's revenue is still heavily reliant on the more traditional PC and smartphone markets, where demand is steady but not robust. The company's ability to manage inventory and maintain pricing power in these areas, despite the broader market's challenges, will be key.

Guidance will likely be the focal point for investors. Although Micron has exceeded EPS and revenue expectations in each of the past five quarters, its stock has reacted negatively in the past due to disappointing forward guidance. Last quarter, despite beating expectations, the company's inline Q4 revenue guidance led to a sell-off. This time, with a lower bar to clear, Micron's outlook for Q1 2025, where analysts expect EPS of $1.52 and revenue of $8.27 billion, will be critical in maintaining the stock's recent recovery. Analysts are cautiously optimistic, with some suggesting that the earnings report could be a modest positive for the stock if Micron can meet or slightly exceed these expectations.

In its Q3 2024 earnings presentation, Micron provided guidance that reflects its positive outlook for the coming quarters. The company forecasts revenue of $7.60 billion, plus or minus $200 million, for Q4 2024. This guidance indicates continued strong demand, particularly driven by AI-related products and data center growth. Gross margin for Q4 is expected to be around 34.5%, plus or minus 1.0%, supported by favorable pricing trends and an increasing mix of high-margin products such as HBM (High-Bandwidth Memory) and high-capacity DIMMs.

Operating expenses for Q4 are projected to be approximately $1.06 billion, plus or minus $15 million, reflecting ongoing investments in research and development, especially in areas critical to Micron's long-term growth like AI and data center solutions. The company also expects diluted earnings per share (EPS) to be $1.08, plus or minus $0.08, based on a share count of approximately 1.14 billion diluted shares.

Micron's outlook for the full fiscal year 2024 includes a capital expenditure (capex) plan of around $8.0 billion. The company anticipates that capex spending will increase significantly in fiscal 2025, reaching around the mid-30s percentage range of revenue. This increase will primarily support the ramp-up of HBM production, assembly and test equipment, as well as the construction of new fabs in Idaho and New York. These investments are deemed necessary to meet the anticipated growth in demand over the latter half of the decade.

The company also highlighted its expectations for the industry, forecasting mid-teens percentage growth in bit demand for both DRAM and NAND for calendar year 2024. Micron believes that industry supply will remain below demand, particularly as the ramp-up of HBM production consumes a significant portion of wafer supply, thereby tightening overall DRAM supply.

Micron plans to maintain its disciplined approach to supply growth and capex investment while focusing on improving profitability. The company expects to end fiscal 2024 with a reduced wafer capacity in both DRAM and NAND, compared to peak levels in fiscal 2022. This strategic approach will enable Micron to optimize its inventory and capex investments to better align with market conditions and demand trends.

Overall, Micron's guidance underscores its strong position in the rapidly growing AI and data center markets, with a clear strategy to capitalize on these opportunities while maintaining financial discipline. The company's confidence in achieving record revenue and significantly improved profitability in fiscal 2025 is supported by its ongoing shift towards higher-margin products and strategic investments in capacity expansion.

On August 7, 2024, Micron announced its decision to reopen its share repurchase program, which had been temporarily suspended on December 21, 2022, due to the industry downturn. The repurchase program, originally authorized by the Board of Directors on May 21, 2018, allows for stock repurchases through open market purchases, block trades, privately negotiated transactions, and/or derivative transactions, subject to market conditions. The decision to resume repurchases reflected improved industry conditions and is intended to help offset dilution from employee stock purchase programs.

Micron (MU) delivered strong results in its prior quarter, driven by robust demand for its high-bandwidth memory (HBM) chips, which are crucial for AI data centers, as well as higher prices for DRAM and NAND memory chips. The company easily surpassed Q3 EPS and revenue estimates, highlighting its success in capitalizing on the AI-driven demand. Notably, data center revenue surged by over 50% in Q3, reaching a record high, fueled by the strong demand for HBM. However, despite these impressive figures, MU's Q4 revenue forecast of $7.40-$7.80 billion, which represents a 90% year-over-year growth at the midpoint, slightly missed investors' lofty expectations, leading to a muted market reaction.

While MU's Q4 guidance indicates substantial growth, the results didn't resonate as strongly with investors due to comparisons with NVIDIA's (NVDA) standout performance in the AI space. Despite MU's continued reliance on revenue from the PC and smartphone markets, which are expected to grow at a more modest pace in 2024, the company is well-positioned to benefit from the growing integration of AI in these devices. With the rise of AI smartphones and PCs, which require significantly more DRAM content, MU is set to see AI become a larger portion of its revenue mix. Additionally, MU is ramping up its capital expenditures, with an estimated $8 billion for FY24 and plans for increased spending in FY25 to meet the surging demand for its HBM3E chipset. Despite the positive outlook, the stock's year-to-date rally and high valuation led to profit-taking among investors following the earnings report.

Micron's Q3 earnings call provided a comprehensive update on the company's performance and the broader industry outlook, with a particular focus on its DRAM and NAND businesses, as well as the critical role of High-Bandwidth Memory (HBM) in its future growth. CEO Sanjay Mehrotra emphasized that the company exceeded revenue, gross margin, and EPS expectations, driven by improved supply-demand conditions and robust pricing, particularly in AI-driven data center products. The increasing demand for AI applications, including servers, smartphones, and PCs, has positioned Micron to capitalize on significant growth opportunities in the coming years.

In terms of DRAM, Micron is ramping up production on its leading-edge nodes, with over 80% of DRAM bit production now on its 1α and 1β nodes. The company is optimistic about the future of its DRAM business, particularly with the introduction of its 1γ DRAM node, which is expected to enter volume production in 2025. Despite some operational disruptions due to a recent earthquake in Taiwan, Micron remains on track with its production and cost-reduction goals for fiscal 2024, with DRAM front-end cost reductions expected in the high single-digit percentage range.

NAND production is also on a strong trajectory, with over 90% of Micron's NAND bit production on its two leading-edge nodes. The company is focused on further cost reductions, with fiscal 2024 NAND front-end cost reductions projected in the low teens percentage range. The continued ramp-up of its 232-layer NAND node positions Micron well for future growth, particularly as demand for data storage in AI applications continues to rise.

High-Bandwidth Memory (HBM) was highlighted as a key growth driver for Micron, especially in AI data centers. The company generated over $100 million in HBM3E revenue in Q3, and expects to achieve several hundred million dollars of revenue from HBM in fiscal 2024, with multiple billions anticipated in fiscal 2025. Micron's HBM solutions are in high demand, with shipments sold out for 2024 and 2025. The company is confident in its ability to maintain technology leadership in this area, with plans to introduce next-generation HBM4 products that will offer further performance and capacity enhancements.

Micron's outlook for the industry remains positive, with expectations for mid-teens percentage growth in DRAM and high-teens percentage growth in NAND bit demand over the medium term. The company anticipates a tight supply environment, particularly for DRAM, as the industry continues to recover from the challenges of 2023. This tightness is expected to drive further improvements in profitability and return on investment, supporting the necessary investments for future growth.

Looking ahead, Micron plans to increase its capital expenditures significantly in fiscal 2025, with a focus on expanding its HBM production capabilities and constructing new fabs in the U.S. These investments are critical to meeting the expected demand growth in the latter half of the decade, and to maintaining Micron's leadership position in the memory and storage industry. Despite the substantial capex plans, Micron remains committed to disciplined spending and optimizing its supply growth to align with industry demand.