Finally, AI is making waves in the memory chip industry.

On February 20, 2024, Micron Technology (MU), a leading memory chip company, released its Q2 financial results for the 2024 fiscal year. Its stock surged by 14% after the earnings and hit record highs in the following days.

Micron has long been regarded as a barometer for the semiconductor industry, indicating its significant position within the sector. Therefore, understanding Micron's earnings report can provide valuable insights into the semiconductor industry.

This article delves into three aspects of Micron's business: its position as a semiconductor bellwether, its cyclicality, and its growth prospects, to help readers better understand the company.

Why Micron is considered  a Semiconductor Bellwether

Micron Technology primarily focuses on memory chips. Its financial reports are pivotal for the semiconductor industry, as many sectors rely on memory chips.

Memory chip products mainly consist of two types: DRAM and NAND, which can be understood as memory modules and hard drives, respectively. These chips are essential for various electronic products and data centers.

Despite not leading the memory chip market globally, Micron holds a significant position.

The NAND market is highly concentrated, with the top five companies holding over 95% of the market share, according to Trendforce. Micron ranked fifth with a 13.5% market share. Samsung and SK Hynix rank first and second, with a market share of 32.3% and 18.6%, respectively.

In comparison, the barrier to entry for the DRAM market is higher, with only three major players: Samsung, SK Hynix, and Micron. Micron ranks third in market share, accounting for 25.8%, according to Trendforce.

Micron's Cyclicaity

The memory chip market displays distinct cyclical patterns, driven by fluctuations in industry supply and demand influenced by technological advancements and economic conditions.

Micron's product pricing heavily relies on downstream market demand: strong demand leads to increased sales and supply shortages, driving prices up, while weak demand results in inventory buildup, prompting price reductions to clear stock.

Understanding a company's position within the cycle is crucial. Since 2022, the memory chip industry has faced an unprecedented downturn due to sluggish demand and high inventories, with the global market shrinking to $89.6 billion in 2023, a 40% drop from 2021, according to Statista.

Micron was also affected by this decline, with revenue plunging by nearly 50% in the 2023 fiscal year, and net profit turning into a significant loss.

However, signs of recovery emerged in the 2024 fiscal year, sparking investor optimism about a potential cycle turnaround.

Key indicators of this potential upturn may include Micron's inventory and chip prices.

Micron publishes its inventory situation and days inventory outstanding (DIO) every quarter. DIO measures how quickly a company sells its inventory. A low value indicates fast sales and a quick turnaround.

The company reported a DIO of 160 days in FY24Q2, signaling a continuing decline toward the targeted 120 days by the end of FY2024 (excluding strategic inventory).

Furthermore, management expects memory chip prices to increase further throughout the calendar year 2024, according to Micron FY2024 Earnings Call Transcript.

These factors suggest that the industry's downturn may be nearing its end and upturn is about to start.

Micron's Growth Potential

Micron's potential for growth is intricately linked to its participation in the data center market, driven by demand for High Bandwidth Memory (HBM) chips.

While the PC and smartphone sectors show limited expansion opportunities, data centers require advanced memory solutions to handle big data and AI applications, making HBM a critical revenue stream.

Micron's latest HBM product, HBM3e, has been validated by NVIDIA for use in their AI chips.

How much revenue can HBM3 bring to Micron?

The company commenced volume production and recognized the first revenue from HBM3E in fiscal Q2 and now has begun high-volume shipments of its HBM3E product.

The company expects HBM to generate hundreds of millions of dollars in revenue for the company in the fiscal year 2024, with projected increases in Micron's overall gross margin starting from the next quarter.

Furthermore, the company disclosed that HBM is currently in high demand, with HBM for 2024 already sold out and most of the supply for 2025 already allocated.

In other words, the demand for AI memory chips will gradually manifest in Micron's revenue starting from the next quarter, becoming a growth engine for the company's revenue

In Summary

• Micron is a semiconductor chip company primarily focused on memory chips, with its financial reports regarded as a barometer for the semiconductor industry. Micron ranks fifth in the NAND market and third in the DRAM market.

• The memory chip market is influenced by cyclicality. The industry experienced a winter in 2023, resulting in a decline in revenue, but indicators such as days of inventory outstanding and expected price increases suggest that the industry may be recovering.

• Micron's growth potential primarily comes from the data center market, with HBM being the key. HBM3 is expected to generate hundreds of millions of dollars in revenue for the company in the 2024 fiscal year and become a revenue growth engine for the company.

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