Micron earnings report will set the tone for AI and tech
AInvestMonday, Jun 24, 2024 10:23 pm ET
7min read
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Micron Technology's ($MU(MU)) upcoming earnings report is highly anticipated, particularly by investors in the AI market. As AI data centers increasingly require high-bandwidth memory (HBM) alongside GPUs, Micron's performance and projections are critical indicators for the sector.

The demand for AI-capable phones and PCs is also expected to surge, further boosting memory requirements. This report will serve as a crucial data point for AI investors, offering insights into the trajectory of AI-related revenue growth until big tech companies release their earnings later in July and NVIDIA reports in late August.

Micron's strategic goals and current market position underscore the importance of this earnings report. The company aims to capture approximately 25% of the HBM market by 2025, a significant target given the competition from SK Hynix and Samsung. Although Micron has secured a design win with NVIDIA's ($NVDA(NVDA)) H200, competitors like SK Hynix are leading with the H100, and Samsung is advancing with the B200. However, recent reports suggest that Micron's HBM3E will be used in NVIDIA's GB200 chip, highlighting the company's technological advancements despite challenges in production volume and yield.

During the conference call, investors will be keenly watching for updates on Micron's guidance, particularly in relation to AI-driven products such as HBM3E, DDR5, and eSSD. Analysa expect that Micron's guidance will exceed estimates due to strong pricing and improving fundamentals, which could attract new types of investors. Additionally, insights into Micron's partnerships, especially with NVIDIA, and how they are catching up to competitors in the high-end memory space will be crucial.

Lastly, the broader implications of Micron's performance for the AI market will be a focal point. Gene Munster's tweet emphasizes the significance of this week for AI investors, suggesting that Micron's results will affirm the strength of the AI trade. Expectations are high that Micron's revenue growth for CY25 will surpass the current 50% year-over-year projections, reinforcing the long-term bullish outlook on AI-driven memory demand. This earnings report will set the tone for the AI sector until the next wave of earnings from major tech companies.

The Memory Sector

The memory market is highly influenced by supply and demand dynamics, with price fluctuations often reflecting these changes. During periods of high demand, such as from 2016 to 2018, memory prices and margins saw significant growth. However, unseasonably low smartphone demand at the end of 2018 led to a supply glut and price declines, a trend that continued until the COVID-19 pandemic caused severe supply shortages and subsequent price surges. The market faced another downturn as global supply chains recovered and inflation reduced demand for consumer electronics, leading to excess supply and falling prices. This cycle bottomed out for Samsung and SK Hynix in early 2023, while Micron saw a recovery in DRAM sales later in the year.

Micron's recent 10-Q report highlighted the company's strategic response to the record demand for high-bandwidth memory (HBM), a specialized type of DRAM crucial for AI applications. The company has reallocated equipment from older technology nodes to leading-edge nodes, reducing its wafer capacity for older DRAM and NAND products. This strategy has contributed to supply constraints and potential price increases for these older technologies. Meanwhile, both Samsung and SK Hynix are also reportedly slowing their capacity expansions for non-HBM products, further tightening supply and supporting price growth.

The HBM market is intensely competitive, with Micron, SK Hynix, and Samsung vying for dominance. Despite entering the HBM market later than its competitors, Micron has made significant strides, securing key design wins with NVIDIA's H200 and potentially the GB200 platform. While SK Hynix leads with its superior MR-MUF stacking method and has plans to accelerate the production of future HBM generations, Micron has demonstrated strong capabilities by addressing yield issues that have plagued SK Hynix. The competition remains fierce, with HBM prices expected to continue rising through 2025, making Micron's upcoming earnings report crucial for gauging its progress and competitive position in this vital market segment.

Q3 Expectations

Micron Technology (MU) is set to report its Q3 earnings with consensus expectations for EPS of $0.48 and revenue forecasted between $6.66 bln. Guidance was for EPS in the range of $0.38-0.52 and revenue between $6.4 billion and $6.8 billion. 

Analysts are optimistic about Micron's performance, particularly driven by its advancements in high-bandwidth memory (HBM) technology. Wolfe Research recently raised its price target on the stock to $200 from $150, citing stronger industry conditions and optimism around HBM. Citi also reiterated its Buy rating, increasing its price target to $175 from $150, based on the DRAM upturn and Micron's increasing AI memory exposure.

Analysts from Wolfe Research expect bullish commentary from Micron's report, highlighting that while near-term conditions are favorable, their bullish outlook is more focused on the longer-term potential in CY25/26. They project that Micron's EPS could reach $20, with HBM contributing about $3 of that earnings power. The significant impact is anticipated from tightening supply in the commodity DRAM market due to rising HBM demand, which is expected to push DRAM prices and margins higher.

Citi analysts also expect Micron to exceed both results and guidance, driven by a DRAM market recovery and the company's expanding footprint in AI memory. They have adjusted their estimates and believe Micron should trade at a premium to its historical range given its AI exposure. Year-to-date, Micron's stock has surged approximately 63%, reflecting strong investor confidence and robust market conditions.

UBS and BofA Securities have also expressed positive sentiments, with UBS raising its price target based on industry checks suggesting favorable pricing trends for DRAM and NAND memory. BofA added Micron to its US 1 List, underscoring the firm's top investment ideas. These upgrades and positive outlooks reflect the broader industry recovery and Micron's strategic positioning in the HBM market.

Cantor Fitzgerald maintains a highly positive view on Micron, reiterating that the upcoming earnings report could be a positive catalyst due to expectations of a beat and raise. They acknowledge recent challenges, including an accident and HBM yield excursions, but believe that the earnings report will address these concerns and reinforce Micron's strong position. Despite mixed signals from the PC, smartphone, and server markets, analysts remain confident in Micron's long-term growth potential, especially with its increasing AI memory market share.

Analysts are bullish on Micron's long-term prospects, particularly due to its advancements in HBM technology and the broader industry recovery. With multiple price target upgrades and positive ratings from major research firms, Micron is well-positioned to deliver compelling results and guidance, further solidifying its place in the AI memory market.

Wall Street analysts are optimistic about the upcoming earnings release, with sixteen upward EPS revisions in the last 90 days. Fiscal Q3 2024 revenue is forecasted to be $6.67 billion, a 78% increase compared to the same quarter in 2023. The adjusted EPS is expected to rise sequentially from $0.42 to $0.52, showcasing the momentum in Micron's operating leverage. Micron's history of delivering strong revenue and EPS surprises, barring the geopolitical disruptions between FQ3 2022 and FQ2 2023, adds to the positive sentiment. With geopolitical challenges largely behind them, the company is likely to continue its strong performance.

Q2 Earnings Recap

Micron Technology, Inc. (MU) delivered an impressive performance in its Q2 earnings, significantly surpassing market expectations and showcasing the strength of its high-bandwidth memory (HBM) chips, which are pivotal for artificial intelligence (AI) applications. 

The company reported adjusted revenue of $5.82 billion, marking a 58% year-over-year increase, well above the estimated $5.35 billion. Additionally, the adjusted earnings per share (EPS) came in at $0.42, a remarkable turnaround from a loss per share of $1.91 in the previous year, and far exceeding the anticipated loss of $0.24 per share. These strong results underscore the growing demand for Micron's advanced memory products in the AI market.

A key driver of Micron's success is its HBM product line, particularly the newly launched HBM3E chipset. The company commenced volume production and recognized its first revenue from HBM3E in Q2, positioning itself as a leader in the HBM market. HBM chips, which are crucial for AI data centers due to their higher performance and lower power consumption compared to traditional memory, command premium prices and are less commoditized. Micron's HBM3E is notably integrated into NVIDIA's H200 Tensor Core GPUs, linking Micron's success to NVIDIA's robust AI growth.

Micron's strong Q2 performance was bolstered by positive guidance for the upcoming quarter. The company forecasts Q3 adjusted EPS between $0.38 and $0.52, significantly above the consensus estimate of $0.24. Similarly, Micron expects Q3 adjusted revenue to range from $6.4 billion to $6.8 billion, compared to the estimated $5.99 billion. This optimistic outlook reflects Micron's confidence in sustained demand for its high-end memory products, particularly as AI technologies continue to proliferate.

The company also highlighted favorable supply-demand dynamics, which are expected to support margin expansion and profitability. Micron noted that the inventory glut in the PC and smartphone markets has subsided, with expectations that industry bit supply will be below demand for both DRAM and NAND in 2024. This shift is anticipated to drive further margin improvements, as evidenced by the non-GAAP gross margin soaring to 20.0% in Q2 from 0.8% in Q1, far exceeding the company's guidance.

Looking ahead, Micron's strategic position in the AI market and its robust product portfolio suggest a promising fiscal second half of 2024. The company is set to benefit from increased AI server shipments and the growing demand for AI-enabled devices, which require significantly more memory. Micron's commitment to advancing its technology and meeting high demand positions it well to continue delivering strong financial performance and capitalize on the ongoing AI revolution.

Micron Valuation

Micron Technology's stock has experienced a remarkable rally, surging 93% since last November. This impressive performance can be attributed to the company's resurgence following geopolitical challenges during the 2022-2023 fiscal years. Analysts predict that Micron is poised to deliver strong quarterly earnings on June 26, with positive forward-looking comments from management expected. However, current valuation analysis suggests that the stock may be slightly overvalued, indicating that much of the optimism may already be priced in.

The last quarterly earnings release on March 20 saw Micron exceeding consensus estimates with significant revenue and EPS surprises. Revenue grew by an astounding 57.7% year-over-year, while adjusted EPS reached $0.42, a notable improvement from a deeply negative position in the previous year. Despite these gains, Micron's operating margin, which turned positive at 3.3%, remains far below its historical highs of over 30%. Additionally, the company's free cash flow is still negative, as cash generated from operations was less than capital expenditures. Nonetheless, Micron's balance sheet remains robust with $9 billion in cash and total debt representing less than 10% of its market cap, indicating strong financial health.

Micron's stock has outperformed the broader U.S. stock market, rallying by 112% over the past twelve months and showing robust performance in 2024 with a 63.5% year-to-date increase. However, this significant rally has led to elevated valuation ratios. For instance, the forward P/E ratio is 131.58, significantly higher than the sector median of 23.59. Similarly, the forward EV/Sales ratio of 6.42 is much higher than the sector median of 2.97. These elevated multiples suggest that the stock is trading at a premium compared to both its historical averages and sector benchmarks.

Despite the high valuation multiples, there is an argument to be made for further upside in Micron's stock. The memory market dynamics and the increasing demand for high-bandwidth memory (HBM) in AI applications could drive further growth. While the current prices reflect a lot of optimism, the market's willingness to pay high multiples for growth stocks, as seen with companies like Broadcom, indicates potential for additional gains. Investors should closely monitor the upcoming earnings report and management's guidance for insights into the company's future prospects and the sustainability of its current valuation levels.

Conclusion

Micron earnings stands as a key moment for the AI sector. The group has been under selling pressure following a massive rally. The move suggests profit-taking which is understandable. Another blow out earnings report from MU could remind investors why they have money parked in this space.

Shares of MU are pulling back from all-time highs ($157.41). As we postulated above, there does appear to be a significant amount of positive news priced into the stock. The results and stock reaction will be a great litmus test for the sector.

Shares of MU are pulling back to test the 20-sma ($135), while the 50-day moving average looms just below at the $125 area. The last time we saw the 20-day breach for a test of the 50 was back on May 31. MU firmly held that level and then proceeded to rally 15% over the next two weeks.

The reaction on Wednesday will be telling. Perhaps the worst case scenario for AI stocks would be a blow out report by MU that fails to garner a rally and then shares slide lower. That would signal the near-term rally in AI may be drying up.

Investors will need to closely track this earnings report as it will set the tone for the upcoming Q3 earnings season for the tech sector. 

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