Micron Technology Q3 2024 Preview: Revenue is expected to surge by more than 70%, AI catalyzed performance growth

After experiencing the positive market in 2024, can Micron deliver a high standard of answer in line with market expectations this quarter?

As a semiconductor component manufacturing company, Micron is organized into three divisions: Computing and Networking Unit (CNBU), Mobile Business Unit (MBU), Embedded Business Unit (EBU), and Storage Business Unit (SBU), which produce and supply storage and imaging products. The CNBU segment sells dynamic random-access memory (DRAM) products to the client, cloud server, enterprise, graphics, and networking markets. The MBU segment is involved in DRAM and NAND flash memory products sold to the smartphone and other mobile device markets. The EBU segment focuses on memory and storage products sold to the automotive, industrial, and consumer markets. The SBU segment includes solid-state drive and component-level solutions sold to the enterprise and cloud, client, and consumer storage markets.

It can be seen that Micron's revenue mainly comes from supplying different types of memory chips or storage hardware to embedded markets, including the computing network market, the mobile device market, and the automotive market. Its revenues are primarily affected by changes in demand and pricing in various downstream markets.

The memory chip industry is currently an oligopoly market. The market share is dominated by five companies, including Micron. Among them, Samsung Electronics as the leader, accounting for about 30-40% of the market share, followed by SK Hynix accounted for about 20-30%, Micron ranked third to fourth, its DRAM market share of about 20%, NAND market share of about 10%. It can be seen that a few leading companies can adjust the supply according to market demand and control the chip market pricing through negotiation and cooperation. Micron therefore has certain control power over its market pricing.

The memory chips Micron sells are mainly composed of DRAM and HAND. DRAM (Dynamic Random Access Memory) is the main memory used in computers and other devices to provide fast and frequent data access and processing. NAND is a non-volatile storage technology commonly used in solid-state drives, USB flash drives, memory cards, and other types of persistent storage devices. It can also maintain data in the event of power failure, making it more suitable for long-term data storage. Micron also develops and sells solid-state drives products based on NAND chip technology.

Micron's downstream markets range from large calculator and networking businesses to mobile devices, embedded chips and solid-state drives. Among them, the large calculator and network business market mainly includes Nvidia, Google, IBM and other enterprises that have memory requirements for data center and cloud computing services. The mobile device market includes makers of consumer electronics personal devices such as Apple and Lenovo. The embedded chip market includes manufacturing manufacturers such as Tesla and Qualcomm that have memory requirements for device digitization services. The SSDS market is divided into enterprise SSDS, which are higher quality and have more storage capacity for data centers, servers and enterprise storage systems, and consumer SSDS, which are mainly used in personal computers, laptops and other consumer electronics.

As the AI enterprise wave grows, more and more enterprises are deploying AI in their operations and services. The application of AI has increased the requirements for processor memory. Compared with the low demand of the memory chip market in 2022-2023, the market has increased the demand for chip production and good memory capacity of chips at the same time. This increase in demand is mainly reflected in the surging demand for high broadband memory (HBM) market. At the same time, due to the technical iteration of the product, the HBM capacity of a single chip will also be rapidly increased. According to the forecast, HBM's share of total DRAM bit capacity is expected to increase from 2% in 2023 to 5% in 2024. In terms of market capitalization, HBM is expected to account for more than 20% of DRAM's total market capitalization starting in 2024. In the HBM internal market, HBM3E has gradually become the mainstream. Micron also introduced its HBM3E product. According to management data analysis, the HBE3E chip developed by Micron reduces power consumption by 30% compared to the alternative. The product will be used in Nvidia's H200 Tensor Core graphics processing unit (GPU) and has already begun shipping.

In terms of price, due to the downward cycle of the 2022-2023 chip industry, the major leading companies have collectively reduced production, resulting in the current overall DRAM production capacity is limited, and suppliers have higher pricing power. At the same time, not all suppliers pass the HBM3E test, and its yield is only 40%-60%, which also leads to buyers having to accept higher prices to ensure stable and high-quality supply. HBM buyers remain confident in AI demand and are willing to accept price increases. At present, the price negotiation for 2025 has been preliminarily increased by 5-10%.

The less commoditized nature of HBM allows Micron to command higher prices, enabling them to achieve higher profit margins than standard memory chips. According to Bloomberg forecast, its computing and networking business unit will reach $2.564 billion in revenue in the third quarter, up 84.62%.

Micron could benefit slightly from a 2 to 3 percent growth in smartphone shipments in 2024, according to IDC, as well as an 18 percent growth in 5G shipments with higher DRAM and NAND content. A modest rebound in PC shipment growth to 2 percent in 2024 and stable shipments of traditional servers are likely to boost demand in the second half of the year, driven by seasonal strength. Stable demand will drive the mobile device market to achieve supply-demand balance in 2024.

AI embedding in mobile devices as a long-term trend will drive local device updates and the need for high memory. Micron expects the DRAM capacity of AI phones to increase by 50 to 100 percent compared to non-AI flagship phones. On the DRAM side, Micron is testing the second-generation 1-beta LPDRAM LP5x product, which offers the industry's highest performance and higher power consumption for flagship smartphones. On the NAND side, Micron released the second generation of 232 layer NAND UFS4.0 devices.

At the same time, Micron announced on May 7, 2024 that it will provide the LPCAMM2 equipped with LPDDR5X memory chip for the AI-enabled Lenovo ThinkPad P1 Gen 7 workstation. In addition to this, Micron also announced that it has begun offering customer samples of its next-generation GDDR7 graphics memory chip for gaming and AI.

However, while companies such as Micron are actively updating their development of memory chips in mobile devices, there are few opportunities for AI-related content expansion on mobile in the near term. For the iPhone 16, Apple may leverage ChatGPT or Google's Gemini model to handle more complex workloads in the cloud while reducing on-premises AI capabilities. Newer models require little additional DRAM content. As a result, the long-term content growth outlook for mobile is more positive.

According to Bloomberg consensus forecast, its mobile business unit in the third quarter of revenue will reach 1.631 billion, up 99.14%

Micron announced a complete suite of automotive-grade solutions for Qualcomm's (QCOM) automotive platform. Micron said it will contribute its LPDDR5X memory chip, UFS 3.1, Xccela flash memory, and four-way serial peripheral interface NOR flash memory, which will be pre-integrated into Snapdragon automotive solutions and modules. These chips will be applied to all digital functions of the vehicle, including infotainment systems, ADAS systems and digital cockpits. While vehicle sales won't improve during the second quarter, additional content sales per vehicle could provide Micron with some tailwind in a flat auto market. According to Bloomberg consensus forecast, its EBU division's revenue in the third quarter will reach 1.273 billion, an increase of 39.59%

In the enterprise SSD market, Samsung proposed in April that it would implement 20-25% price increases for products in the second quarter of 2024, aiming to reverse the downward trend since 2023. Since Samsung has about half of the enterprise SSD market, it will have a significant impact on pricing decisions. Due to the low SSD order fulfillment rate (OFR), suppliers still dominate the price trend, and the market may be forced to accept the price increase proposed by suppliers.

In terms of consumer SSD, as global technology giants accelerate the layout of artificial intelligence, Dell, HPE and other server manufacturers compete to purchase SSD, and the market demand for large-capacity SSD surges, driving the second quarter of enterprise-grade SSD procurement growth of more than 20%. At the same time, because SSDS also drove enterprise SSD contract prices up by more than 20% in the second quarter, revenue is expected to grow by another 20%. Although Micron has no plans to expand production in the short term, it is working to improve the process yield (the ratio of chips successfully produced to the total number of chips produced), and it is expected that the proportion of its process yield of above 200 layers will exceed 40% in the fourth quarter of 2024, improving its production efficiency and profit margins.

According to Bloomberg consensus forecast, its storage business unit will reach 1.065 billion in revenue in the third quarter, an increase of 69.84%

Overall, each of Micron's main business units is expected to achieve significant revenue growth in the third quarter of 2024, mainly due to the development of AI enterprise wave driven by the increased demand for high-performance storage products in different industries. Among them, the computing network department and the mobile department increased particularly significantly, benefiting from the HBM3E, LPDDR5X and other products developed by Micron and Nvidia, Lenovo and other large application providers cooperation.

Gross profit rose steadily and profitability recovered quickly. According to the forecast, Micron's cost of revenue in the quarter will increase by 8.62% to 4.73 billion. However, due to the significant increase in market demand, its expenditure growth is slower than its revenue growth. Micron's gross margin in the previous two quarters has experienced a rapid recovery, the second quarter from the previous 0.8% to 20%. Gross margins will rise to 27.16 per cent in the third quarter, according to Bloomberg forecasts.

In operating expense, selling, general and administrative expenses will increase 27.23% from the previous quarter to $235 million, however, due to the significant increase in revenue, its share of total revenue will decrease to 3.49%, a decrease of 0.45 percentage points from the previous quarter. R&d expenditure will increase 10.39% from the previous quarter to 773 million, and its share of total revenue will decrease to 11.65%, a decrease of 1.31 percentage points from the previous quarter. The operating margin increased by 9.03 percentage points to 12.53%.

Capital expenditure to maintain stability, government subsidies to stimulate development. Micron's capital spending plan for fiscal 2024 remains unchanged at between $7.5 billion and $8 billion. At the same time, under the Chip and Science Act agreement, Micron will receive a $6.1 billion grant this year to support the expansion of its production facilities in New York and Idaho. In addition to direct funding, the Chip Initiative Office can provide loans of up to $7.5 billion to Micron Technology. This grant will enhance Micron's share price by reducing the capital expenditure burden and creating an environment for continued growth and profitability.

In general, due to economies of scale in manufacturing industry, demand drives output and revenue while reducing the average cost per unit of production. Micron's projected cost growth is much slower than revenue growth, and both gross and operating margins are rising steadily. On the basis of stable capital expenditure, government subsidies will reduce the expenditure burden and create a profitable environment. Micron is expected to generate $6.688 billion in revenue in the third quarter, YOY+77.73%; net income of $544 million, YoY+134.80%; Earnings per share of $0.50, YoY+135.02%.

According to market forecasts and fundamental analysis, under the influence of the surge in demand driven by AI and the pricing power caused by production cuts in 2023, Micron Technology's revenue would be favorable in the quarter. Economies of scale played a role, cost growth was less than revenue growth, and profit margins improved. Earnings per share are expected to rise 135.02% to $0.50.

Due to Micron's loss in 2023, P/E analysis based on its forecast earnings per share in 2024-2026 shows that its PE multiple in 2024 is about 144.29 (because the fiscal year ends in August, the multiple in 25 and 26 years is more valuable for reference), the multiple in 25 years is 15.61, and the multiple in 26 years is 13.09. Since the chip industry of Micron is a cyclical manufacturing industry, taking the peak of its last upward cycle which appeared in January 2022 as reference, its PE multiple was about 11.39 according to its price and EPS at that time.

So its current valuation may be reasonable or slightly overvalued. At the same time, due to Micron's continued losses in 2023, its current dividend rate is only 0.01% and there is no relevant buyback plan, so investors should have higher requirements for the company's performance growth.

In general, the market for Micron Technology's performance in the quarter is expected to be good. Positive factors have been included in the forecast, the valuation may be reasonable or slightly overvalued.

However, if the results do not deliver the growth the market expects, it is also dangerous at current high valuations.

- Strategy Background: Faced with a company expected to have excellent performance or favorable market conditions, investors predict the stock price will rise.

- Method of Operation: Purchase call option contracts for the corresponding stock, giving the holder the right to buy the stock at an agreed exercise price on the expiration date.

- Profit Logic: If the stock price rises as expected, the value of the call option increases, and investors can profit by selling the option or exercising the right. Even if the stock price increase is less than expected, the investor's maximum loss is limited to the premium paid for buying the option.

The latest option data shows that the implied volatility of the 6.28 expiration option is about 180%, which means that the market expects huge fluctuations in the stock price, about 11.5% up and down, which means that Micron has a high possibility of upward breakthrough or lower pullback in the next few days, so the call option has a certain risk.

- Strategy Background: Considering the high valuation and that it won't rise too much, and wishing to limit downside risk while preserving current profits.

- Method of Operation: Corresponding to the held shares, sell call option contracts, giving the holder the right to sell the stock at an agreed exercise price on the expiration date.

- Profit Logic: If at expiration the stock price is below or only slightly above the exercise price, the option buyer may not exercise, and the investor retains the stock and earns the full premium income; if the stock price significantly exceeds the exercise price, the option buyer will choose to exercise, and the investor sells the stock at the exercise price. Although the profit exceeding the exercise price is lost, the premium and the part of the stock price rise up to the exercise price are retained.