MU Earnings Preview- High expectations as investors look for "AI-bump" from HBM

Micron Technology is scheduled to announce its second-quarter earnings later today, followed by a conference call at 5:30 p.m. ET. Analysts anticipate the company will report a modest loss of $0.25 per share alongside revenues around $5.34 billion. If these predictions hold true, it would mark a significant revenue growth of 43% and represent the narrowest loss Micron has experienced since the same quarter of the previous year.

Last quarter, Micron Technology projected its revenue to be between $5.1 and $5.5 billion with a potential loss ranging from $0.35 to $0.21 per share. This forecast surpassed the analysts' earlier predictions, which expected a loss of $0.62 per share and revenues of $4.97 billion. Additionally, the company anticipates a gross margin of 11.5% to 14.5%. MU has not provided any updates, suggesting it is running in line with those expectations. 

Analysts are generally upbeat about the quarter's results, expecting Micron to beat on both the top and bottom lines. UBS predicts results to be biased towards the high-end of guidance, with revenue and gross margin potentially guided at $6-6.1B and high teens, respectively. Market participants anticipate Micron to return to profitability in Q3, with current estimates suggesting earnings of $0.09 per share and revenues of approximately $6.0 billion.

DRAM bit demand is anticipated to grow in the high-single digits, an increase from previous mid-single digit growth forecasts, while NAND bit demand is expected to continue its high-teens percentage growth.

As Micron Technology gears up to release its Q2 earnings, there's optimism for a performance that surpasses expectations. Analysts foresee a potential beat, emphasizing the significance of the upcoming guidance amid expectations for a return to profitability in Q3. The spotlight is also on Micron's strategic positioning within the DRAM market, specifically regarding the anticipated recovery in DRAM prices and the company's focus on high-value products like high bandwidth memory (HBM). Despite short-term positivity, there's a broader industry concern over future pricing trends. Micron's advancements in HBM technology, crucial for AI applications, particularly with Nvidia systems, are a key area of focus, with significant market share gains projected.

Investors are looking for signs of supply and demand trends tightening throughout 2024 for both DRAM and NAND markets. The leading-edge nodes for both DRAM and NAND are over-subscribed for the entirety of 2024, while conservative industry-wide capital expenditure spending (except for HBM) supports strong pricing increases during the year. However, some analysts warn that this could turn into a long-term weakness on the margin.

Micron's HBM3E technology is gaining traction in the market, with the company expected to capture significant market share in the coming years. Design momentum for HBM3E is encouraging, with estimates of 25%+ market share next year, up from 10-15% this year. Qualification with B100 is expected to be a catalyst for further share gains in HBM.

In its Q1 presentation, MU noted that inventory levels for memory and storage across various sectors like PC, mobile, automotive, and industrial are currently at or close to normal. In the data center sector, inventory is on the path to normalization, expected to reach standard levels by the first half of 2024. The company"s progress in shifting to D5 technology in data center and PC markets puts it ahead of the industry, with a transition expected early in 2024. Additionally, the growing AI market is pushing the demand for memory and storage that offers higher capacity, reduced power consumption, and enhanced performance.

Over the next few years, mid-teens CAGR is projected for DRAM and low-20s for NAND. However, for calendar 2024, bit demand growth is forecasted to align with long-term CAGRs for DRAM and fall slightly below for NAND. Micron plans for its bit supply growth in fiscal 2024 to lag behind demand for both DRAM and NAND, aiming to reduce inventory days within the fiscal year. Industry supply for both sectors in calendar 2024 is expected to be under demand, tightening inventory levels. HBM production ramp-up is set to limit non-HBM product supply growth but will aid in improving the DRAM supply-demand balance, with HBM requiring over twice the wafer supply of D5 for the same bit output. Micron's fiscal 2024 capex is estimated to be between $7.5 billion and $8.0 billion, marking a slight increase from the previous year, mainly to support HBM3E production.

As Micron Technology prepares to unveil its second-quarter earnings, anticipation is high for a report that could exceed analyst expectations. Focus on Micron's earnings report lies in the potential for upside in its estimates during the upcycle, particularly the timing of when DRAM prices will enter a stronger recovery and when the company can benefit from an optimized mix of higher value products, including High Bandwidth Memory (HBM) for AI applications. DRAM demand is currently showing signs of moderation, while server demand exhibits growth as capacity allocations for HBM divert from DDR5 production. NAND remains stable, with visibility expanding into enterprise SSDs and limited capacity expansion by producers, leading to a continued rise in pricing.