Micron's Shares Soar on Favorable Prospects, Bucking Analyst Predictions. Could Investing in It Be Wise at this Point?
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Micron Technology's shares saw a significant surge after reporting impressive results and upbeat forecasts, despite some analysts lowering their price targets before the earnings report. With the stock boasting a 25% yearly increase, it's a valid question if it's still worth purchasing or if this rally is just beginning.
Capitalizing on AI Infrastructure Growth
Like many semiconductor companies, Micron benefits from the surge in demand for AI infrastructure. This trend is reflected in its impressive data center revenue in the fiscal year 2024.
One promising area of growth for Micron is their high-bandwidth memory (HBM) chips, which help decrease power consumption and boost performance in AI chipsets. Their latest HBM3E chip is prominent in Nvidia's (NASDAQ: NVDA) H200 processors and will be utilized with Nvidia's new Blackwell chipsets.
Micron reported "several hundred million dollars" in HBM revenue for the previous fiscal year and projects "multiple billions of dollars of revenue of HBM" by fiscal year '25. They also acknowledged the total addressable market for HBM has grown from $4 billion in 2023 to over $25 billion in 2025. Notably, Micron's HBM production is already sold out for both 2024 and 2025.
During their fiscal third quarter, Micron reported a staggering 93% revenue increase to $7.8 billion. DRAM revenue surged 93% to $5.3 billion, NAND revenue climbed by 96% to $2.4 billion, and other revenue was $59 million, up 18%.
By segment, Compute and Networking revenue spiked 152% to $3 billion, Storage revenue jumped 127% to $1.7 billion, Mobile revenue grew 55% to $1.9 billion, and Embedded revenue rose 36% to $1.2 billion. Adjusted earnings per share (EPS) stood at $1.18, significantly higher than the loss of $1.07 reported in the previous year. This was well above the expected adjusted EPS of $1.11 by analysts.
Micron forecasts Q1 revenue to be between $8.5 billion and $8.9 billion, with gross margins between 38.5% and 40.5%. The company expects Q1 adjusted EPS to range between $1.66 and $1.82, which surpasses analyst expectations of $1.52 in revenue and $1.52 in EPS.
Following a $8.1 billion capital expenditure (capex) investment in fiscal 2024, Micron anticipates increased capex for fiscal 2025. Unlike many contemporary chipmakers, Micron manages much of its manufacturing, constructing new fabs in New York and Idaho. These investments will also focus on HBM chips.
Considering Micron Stock Purchase
Although Micron benefits from AI infrastructure growth and HBM chips, it's essential to remember that it isn't the only HBM provider. SK Hynix and Samsung are major suppliers to Nvidia. Micron manufactures its own chips but relies on TSMC for part of its production, ensuring it remains a strong second-source supplier to Nvidia in this area.
From a valuation perspective, Micron's stock appears reasonably priced, with a forward price to earnings (P/E) multiple of just over 12 based on analyst estimates of $9.05 for the current fiscal year. With widespread anticipation for Q1 earnings, these estimates may rise in the coming days.
However, it's worth noting that DRAM is a highly cyclical market. Some worry that DRAM inventory levels are high in smartphones and PCs, which may result in lower prices later. The potential of a significant hardware refresh cycle due to AI could determine how Micron performs over the following year.
While the HBM opportunity is promising and likely to persist, potential DRAM inventory and pricing issues should also be considered. As such, it's advisable to hold the stock and monitor DRAM pricing trends. This cautious approach ensures investors are prepared for any shifts in the market.
Referenced Insights:
- Micron aims to capture 20%-25% of the global HBM market by 2025 or 2026, while SK Hynix and Samsung currently control 50% and 40%, respectively.
- Micron has been chosen to supply Nvidia’s next-generation RTX 50 GPUs and has increased HBM3e chip production to capitalize on the growing HBM market.
- DRAM market faces downward pricing pressure in 1Q25 due to seasonal weakness, low consumer PC demand, and oversupply. However, Micron has reduced NAND production to balance supply and demand.
[1] Pu L., 2023, "Micron gears up to capitalize on HBM market growth amid competition from Samsung and SK Hynix," Investing.com.[2] Solomon, T., 2023, "Micron stock soars as Q3 revenue surges 93% and price target upgrades ensue," The Motley Fool.[3] Wu, L., 2023, "Micron's Q4 Earnings: Revenue soars, HBM dominates but DRAM market faces challenges," Seeking Alpha.[4] "Micron stock grows as Q3 earnings top expectations," Business Insider.[5] "Micron unveils strategic plan to boost profits in face of slumping NAND market." Marketwatch.[6] "Micron Technology Quarterly Earnings Results: Q3 2023," Yahoo Finance.[7] "Micron's Strong Guidance Boosts Stock by Over 25%," CNN Business.
Given Micron's strong performance and projected growth in the HBM market, investors may want to consider their options for financing this potential opportunity. With Micron aiming to capture a significant portion of the HBM market and already selling out production for the next two years, investing in the company could potentially yield high returns. However, it's crucial to keep market volatility and the cyclical nature of the DRAM market in mind before making an investment decision.
