Micron Earnings Review: Results Exceed Expectations, Expect Explosive Growth in FY25

Global memory chip giant Micron Technology has released its performance results for FY24 Q4. Benefiting from the strong demand for HBM (High Bandwidth Memory) driven by the AI boom, the overall performance significantly surpassed market expectations, with Q4 revenue growing 93.3% year-over-year to $7.75 billion, and Non-GAAP diluted EPS increasing 210.28% year-over-year to $1.18.

As a result of this positive performance, Micron’s stock price surged over 15% in after-hours trading. So, how much growth potential does Micron Technology have in the future?

With the rise of the AI boom, memory is crucial for expanding the boundaries of artificial intelligence and is an essential part of the AI supply chain. In the future, as AI continues to develop, factors such as increasing model sizes, growing input instruction requirements, rising model training demands, surging inference workloads, and multimodal needs will all drive the demand for memory chips. In this fiscal quarter, the company reported a year-over-year revenue increase of 93.3% to $7.75 billion, with Non-GAAP diluted EPS achieving over a twofold increase, mainly driven by the demand from AI, particularly in the data center segment.

The primary product, DRAM, which accounts for about 70% of revenue, saw a quarter-over-quarter increase of 14%, with shipments remaining relatively stable, primarily benefiting from a 15% increase in average selling prices. Meanwhile, NAND products, which account for approximately 30% of revenue, experienced a quarter-over-quarter revenue growth of 15%, with both shipments and average selling prices achieving high single-digit growth.

Chart: Revenue by Product (in millions of dollars)

Source: Company Announcement

1. Strong Demand from Data Centers Drives Record Revenue

Fueled by robust growth in AI servers and low single-digit growth in traditional servers, the company's data center revenue reached a record high in fiscal year 2024, with significant growth expected in fiscal year 2025. Micron's products have a clear competitive advantage in the data center sector, featuring solutions such as HBM, high-capacity D5 and LP5 solutions, as well as a data center SSD product lineup.

(1) HBM: Micron's HBM3E 12-high 36GB solution consumes 20% less power compared to competitors' HBM3E 8-high 24GB solution while offering 50% higher DRAM capacity. The company anticipates ramping up production of its HBM3E 12-high products in early 2025 and increasing the proportion of these products in shipments throughout the year.

(2) High-Capacity D5: The adoption of the high-capacity single-chip 128GB D5 DIMM products is continuously increasing. The company is leveraging its industry-leading LP5 solutions to promote the use of low-power DRAM in data center servers.

(3) SSD: Demand for data center SSDs continues to be driven by strong growth in AI, as well as a recovery in traditional computing and storage. The market share has significantly increased, with data center SSD revenue in fiscal year 2024 growing more than threefold compared to the previous year.

The consumer electronics industry is in a slow recovery phase from the bottom. In 2024, shipments of PCs and smartphones are expected to maintain low single-digit growth. With the ongoing development of AI PCs and AI smartphones, coupled with an accelerated product upgrade cycle, growth is anticipated for PCs and smartphones in 2025.

In the automotive sector, infotainment systems and advanced driver-assistance systems (ADAS) are driving growth in long-term memory and storage requirements. This quarter, the company’s products received 1-beta based 16Gb LP5 automotive market certification, which supports the performance demands of AI-driven digital cockpits and ADAS. Growth in the automotive business is expected to resume in the second half of fiscal year 2025.

Overall, the demand growth in the memory chip industry is primarily driven by strong demand from data center servers. Additionally, the company expects that the industry wafer capacity for DRAM and NAND in 2024 will be below the peak levels of 2022, leading to a continued decline in the supply of traditional DRAM products, while the supply proportion of HBM chips is expected to increase. Against the backdrop of strong demand growth and capacity optimization, the supply-demand structure for memory chips is anticipated to remain at a healthy level, beneficial for driving the company’s sustained revenue growth.

As the supply-demand structure improves, the company's profit margins have shown notable enhancement. In terms of gross margin, the gross margin for FY24 Q4 was 36.5%, a significant increase from 28.1% in the previous quarter. The operating margin rose to 22.52%, up from 13.82% in the prior quarter. The substantial growth in the company's margins is primarily attributed to a significant reduction in front-end costs, increased pricing, and optimization of the product mix.

The company is ramping up production at the industry's most advanced technology nodes in the DRAM and NAND sectors, with expectations that the front-end cost reductions for DRAM in fiscal year 2024 will reach the high end of initial expectations, while the reductions for NAND costs are also in line with company forecasts. For fiscal year 2025, the company anticipates that front-end cost reductions for DRAM (excluding HBM) will fall within the mid to high single-digit percentage range, while NAND cost reductions are expected to be in the low to mid single-digit percentage range. Additionally, benefiting from the surge in demand, the company has increased its product pricing, and the proportion of higher-margin products in shipments has risen, effectively driving the growth of the company’s profitability.

Looking ahead, due to the sustained demand for AI servers, the demand for the company’s related storage products remains very strong, while industry chip capacity has already declined, creating a very optimistic supply-demand landscape for the future, particularly with HBM products experiencing supply shortages. At the same time, the company will prioritize shifting capacity towards higher-value, higher-margin product combinations, such as HBM, high-capacity DIMM, more LP solutions, and data center product line NAND SSDs. Against the backdrop of optimized supply-demand dynamics and product portfolio enhancements, the company’s profit margins are expected to gradually increase.

Chart: Core Financial Data of the Company

Source: Company Announcement

This fiscal quarter, the company delivered impressive performance, with growth in demand for AI servers significantly driving its revenue increase. The supply-demand landscape for the storage industry is expected to remain optimistic through 2025, with products like HBM experiencing supply shortages, which will continue to propel the company's revenue growth. At the same time, benefiting from the improved supply-demand dynamics and product portfolio optimization, the company's profit margins have expanded significantly, with further upside potential anticipated in the future.

According to the company's guidance, revenue for FY25 Q1 is expected to be between $8.5 billion and $8.9 billion, with adjusted diluted EPS projected to be between $1.66 and $1.82, and a gross margin ranging from 38.5% to 40.5%, all of which significantly exceed market expectations. For fiscal year 2024, the company's adjusted diluted EPS is expected to grow by 129.21% year-over-year, and for fiscal year 2025, explosive growth of over five times is anticipated, with growth rates gradually tapering off after fiscal year 2026.

Chart: Company Performance Guidance (in dollars)

Source: Company Announcement

In terms of shareholder returns, the company's current TTM dividend yield is 0.48%. In fiscal year 2024, the company repurchased 3.2 million shares, resulting in an annualized shareholder return rate of approximately 0.77%, which is relatively low, primarily due to the previous instability of the company’s free cash flow. With the anticipated explosive growth in profits for fiscal year 2025 and a backdrop of ample free cash flow, the company is expected to enhance shareholder returns through dividends and share repurchases.

At the current level of shareholder returns, the growth of the company's stock price still relies on the continued explosive growth of its financial performance. The company currently has a market capitalization of $10.694 billion. Based on estimates, the forward Price-to-Earnings (P/E) ratios for fiscal years 2025, 2026, and 2027 are expected to be approximately 10.9x, 7.6x, and 7.2x, respectively, indicating a relatively reasonable valuation.