Up 52% This Year As Memory Market Picks Up, Will Micron Stock Rise Further Following Q3 Earnings?

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MU: Micron Technology logo
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Micron Technology

Micron Technology (NASDAQ: MU) reports its  Q3 FY’24 results toward  the end of June, reporting on a quarter that is likely to see the memory major benefit from stronger pricing for DRAM chips and higher demand for High Bandwidth Memory targeted at artificial intelligence applications. We expect Micron’s revenue for the quarter to come in at about $6.65 billion, up almost 64% compared to last year, while adjusted earnings are likely to come in at about $0.50 per share.

Memory prices have been trending higher after witnessing declines last year. TrendForce estimates that contract prices for DRAM in the second calendar quarter are expected to increase by 13% to 18%. The gains come as memory majors including Micron and Samsung have pared back on their investment in memory capacity while rationalizing production. Moreover, demand is also picking up from the PC market and also from high-end smartphones. Per Trendforce, the projected growth rates for DRAM and NAND flash memory bit demand this year are close to 15% and in the mid-teens, respectively, outpacing the supply growth rates.

Moreover, the rapid deployment of generative AI tools is also driving up demand for high-performance memory solutions.  AI and machine learning algorithms typically require more storage and resources compared to other types of algorithms and this is driving up demand for high-bandwidth memory (HBM) for training large language models and inferencing quickly. Manufacturers of graphics processing units (GPUs) – which are the go-to chips for AI workloads – are also bundling more memory into their systems.  Nvidia’s next-generation Blackwell AI systems have a 33% increase in the HBM3E content.  Micron has indicated that its High Bandwidth Memory capacity for this year has been fully sold, with most of next year’s production capacity already booked. The tight supply environment and weak memory investments by major manufacturers should also give memory vendors strong pricing power in the memory space. Micron expects its total bit share from HBM to be equivalent to its overall DRAM bit shares sometime in the calendar year 2025. Micron is also seeing higher demand for its pricier high-performance DDR5 memory chips and this could also help price realizations and margins. Overall, Micron is guiding for adjusted gross margins of between 25% to 28% for the quarter, up from negative levels in the year-ago quarter.

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Now, the turnaround in the memory markets and the surging interest in AI have meant that MU stock has seen extremely strong gains of almost 75% from levels of $75 in early January 2021 to around $130 now. This compares to an increase of about 45% for the S&P 500 over this roughly 3-year period. In contrast, Arista Networks (NYSE:ANET), a company that also benefits from generative AI, has seen its stock surge by over 300% over the same period. Arista is a market leader in high-speed networks catering to hyper-scalers and big corporations that are major stakeholders in the generative AI trend. Turns out, Arista is part of the 30-stock Trefis High Quality (HQ) Portfolio, which has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Now, coming back to MU stock, can it outperform going forward?

Micron’s valuation is also not unreasonable, with the stock trading at about 16x consensus FY’25 earnings. That said, there are also concerns about the global economy, amid high interest rates and relatively stubborn inflation, which could weigh on consumer electronics sales. There is also a possibility that Micron will not have sufficient capacity to meet the surge in AI-related demand, given the company’s muted capital spending in recent years. We currently have a $101 price estimate for Micron stock, which is about 20% below the current market price. See our analysis of Micron’s valuation: Expensive or cheap for more details. We will be revisiting our price estimate for Micron following Q3 results.

 Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 MU Return 4% 52% 493%
 S&P 500 Return 1% 12% 139%
 Trefis Reinforced Value Portfolio 1% 5% 646%

[1] Returns as of 6/7/2024
[2] Cumulative total returns since the end of 2016

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