Micron Q2 Earnings: A Blowout Report

Summary:

• Micron reported a blowout quarter with adjusted EPS of $0.42 and revenue of $5.82b, beating expectations significantly.
• The company provided strong guidance for Q3, expecting non-GAAP EPS between $0.38-$0.52 and revenue of $6.4b to $6.8b.
• Micron’s growth story is driven by AI demand, tight supply, and the expansion of the high bandwidth memory (HBM) market.

Setting the Stage: Memory and Logic

Micron Technology, Inc. (NASDAQ:MU) is an American IDM (Integrated Device Manufacturer) that designs and manufactures memory semiconductors. The company is a leading provider of DRAM (Dynamic Random Access Memory) and NAND Flash chips.

The semiconductor industry can be generally classified in two segments: logic and memory.

Logic chips get most of the headlines. These are your CPUs and GPUs powering modern data centers. Nvidia’s (NVDA) flagship Blackwell GPU, B100, is the most powerful logic chip ever created, followed closely by the Advanced Micro Devices, Inc. (AMD) MI300. Logic chips perform logic functions, processing bits of information, either a “1” or a “0”, to transform inputs into outputs. They don’t have any capacity to store this information, they simply perform operations on it. Enter: memory.

Memory chips store information so the logic chip can easily fetch data and perform operations on it. Logic and memory chips communicate with one another through a pre-defined Instruction Set Architecture (“ISA”). ARM Holdings Inc. (ARM) and Intel Corporation (INTC) developed the two leading ISA’s, ARM and x86 respectively.

Micron’s memory divisions are segmented by DRAM and NAND. Bits stored in DRAM are volatile, meaning they can only be accessed when the computer is on. When the computer turns off, all the information in DRAM is lost. The most important types of DRAM memory for this discussion are HBM and DDR5.

Computers use non-volatile NAND memory to store information that needs to be accessed across different sessions. SSDs, solid-state drives, use NAND memory. Using an example of a video game loading screen, this would be the time when memory is transferred from an SSD to DRAM. Save data from previous game sessions is transferred from DRAM to SSD before the game turns off. This is why you need to “save” the game before powering off.

The tradeoff between DRAM and NAND is in memory latency. In other words, how long it takes the processor to fetch bits from memory. DRAM is much faster than NAND. Both are critical for modern computers and data centers.

Memory is the ugly stepchild of the semiconductor industry. It’s a commodity and quite cyclical. Manufacturing it is complex and expensive, and Moore’s Law scaling makes it exceedingly difficult to remain on the leading edge. This has led to extreme industry consolidation over time, with three major players in the current DRAM landscape: Samsung (OTCPK:SSNLF), SK Hynix, and Micron.

The most critical leading edge memory processor is currently HBM, or high bandwidth memory. This refers to multiple DRAM dies stacked atop each other and interconnected with TSVs, thru silicon vias, to greatly increase memory capacity. The more memory capacity available to a processor, the more powerful we can make the processor and therefore the computer.

With that context, let’s dive into Micron’s report.

Micron’s Blowout Report

Financials

Micron reported adjusted EPS of $0.42 which was a huge beat on the -$0.24 EPS expectation. Revenue came in at $5.82b, representing a meaningful expectation beat of $470m. Gross margin expanded to 20%, flipping from a negative reading this quarter last year.

The company also provided very strong guidance, expecting non-GAAP EPS between $0.38-$0.52 and revenue of $6.4b to $6.8b for fiscal Q3. This guidance beat expectations of $0.09 EPS and $6b sales significantly. Further, the company guided for non-GAAP gross margin of 25%-28%.

Micron spent $1.25b on CapEx in the quarter and a declared a dividend of $0.115. They guided for 2024 CapEx between $7.5b-$8.0b. Inventory came in at $8.4b and management noted that leading edge supply is very tight.

SG&A expense as a percentage of revenue was only 4%, representing a very efficient organization.

Based on the first two quarterly reports and the company’s guidance for Q3 2024, I expect fiscal 2024 revenues of $24b and non-GAAP EPS of $0.42. This would represent revenue growth of 54% from FY 2023. Accordingly, the current post-market price of about $112 represents an estimated P/S of about 5.1. This is high for a cyclical business, but we are entering a cyclical upswing with a very compelling growth story, so the premium is justified. Micron’s earnings in the coming years will contribute to strong CapEx and R&D investments to maintain its position on the leading edge for years.

Let’s talk about the growth story now.

Growth Story

The headline of the press release was “AI demand and tight supply accelerate return to profitability”.

This supply-demand balance tightened from a combination of 1) strong AI server demand 2) healthier demand in end markets, and 3) supply reductions across the industry.

AI servers are driving demand for HBM, DDR5, and SSDs. Leading edge supply is tight for DRAM and NAND, leading to upward pressures on prices and Micron’s gross margin expansion. Management expects record revenue and improved profitability in 2025.

The ongoing volume ramp of 1-alpha and 1-beta DRAM bits will improve cost profile in calendar year 2024. Pilot production of 1-gamma DRAM node, using EUV, has started and is on track for volume production in 2025. Data center memory and storage inventories have improved and are expected to normalize throughout the first half of 2024.

Micron CEO Sanjay Mehrotra had an optimistic tone in the report:

“We are in the very early innings of a multiyear growth phase driven by AI as this disruptive technology will transform every aspect of business and society… Memory and storage technologies are key enablers of AI in both training and inference workloads, and Micron is well positioned to capitalize on these trends in both the data center and the edge”

Nvidia’s new GPU accelerator Blackwell continues the trend of steadily increasing HBM content per GPU, and Micron’s high-volume HBM3E shipments have begun. It will be in Nvidia’s H200 Tensor Core GPUs and the company is in talks with numerous other customers.

The company now expects “several hundred million dollars of revenue from HBM in fiscal 2024” and expects HBM to be margin accretive to DRAM & overall gross margin in Q3 2024. Additionally, HBM supply is sold out for calendar 2024, and the overwhelming majority of 2025 supply has already been allocated.

They’ve also begun sampling 12-high HBM3E stack, expecting to ramp in throughout 2025. This refers to the number of DRAM dies in the HBM stack, so 12-high is 12 DRAM dies. The company also reported record revenue in data center SSD.

Aside from the data center market, AI is driving demand in PC’s and mobile. AI PCs should drive strong PC growth as NPU chipsets use 40-80% more DRAM. AI mobile phones carry 50-100% more DRAM, according to the company.

Demand in the auto and industrial markets are solid as well with new vehicle platforms and ADAS fueling more memory demand.

Accordingly, the company expects mid-teens CAGR in DRAM demand and low-20s CAGR in NAND demand over the medium term. They also expect 2024 supply for DRAM and NAND to be below demand and accordingly days of inventory will decrease.

Using older WFE equipment on leading-edge nodes contributing to the supply reduction as leading-edge chips have longer manufacturing timelines. HBM3E is using more fab capacity and decreasing supply of other products, and HBM4 will exacerbate this trend. This is leading to improved pricing power in mature products and adds credence to the expectation of gross margin expansion in 2025, since HBM is also expected to be margin accretive.

Concluding Thoughts

I entered the day today planning to cover Micron’s earnings. However, I had expected a Hold rated article, given memory’s cyclicality and the stock’s recent strong performance. I thought most of the growth story was priced in and that Micron’s valuation had become stretched.

This report changed that view, and I am now much more bullish on Micron’s medium-term outlook. The growth story here is compelling as long as you believe demand for AI accelerators will be robust. I do believe this demand is robust at least through 2024, and therefore am initiating coverage of Micron with a Buy rating.

Micron is a leader in the memory industry and will be a critical player in the ongoing build of accelerated computing infrastructure.

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