AMD reported an in-line quarter on both revenue and EPS, with data center revenue coming in just above $2.3 billion for 80% YoY growth and a slight 2% QoQ increase. Margins were stable, with management guiding for a slight 100 bp QoQ expansion in adjusted gross margin. Cash flows improved sequentially, with AMD posting strong double-digit QoQ growth in both operating and free cash flow.

AMD’s GPU revenue forecast was boosted by ~14%, with management now seeing full year revenues at $4 billion, compared to its prior view for $3.5 billion plus. However, analyst expectations were largely pointing to $4 billion as the ‘minimum’ figure, with some looking for GPU revenue as high as $8 billion. The raise is welcomed with MI300 cumulative sales surpassing $1 billion since the launch in Q4, however, it’s not enough to meet a wide range of heightened expectations.

Below, we breakdown the glass half-full or glass-half empty psychology that is overshadowing AMD’s accomplishments right now (and which side of the proverbial debate we are on, and why).

Revenue and EPS:

• Q1 revenue was $5.47 billion, marginally ahead of expectations for $5.45 billion and representing YoY growth of 2.2%.
• Q2 revenue was guided at $5.7 billion, +/- $300 million for YoY growth of approximately 6% and QoQ growth of 4%. This was in line with consensus estimates for $5.69 billion.
• Q1’s adjusted EPS was $0.62 in line with estimates for $0.61, representing YoY growth of 3%. GAAP EPS was $0.07 which missed estimates of $0.17 EPS.
• Q2 estimates from analysts are for $0.69 EPS in the June quarter and $1.00 in the September quarter.

Key Segments:

Data Center:

AMD had guided for Q1 data center revenue to be approximately flat QoQ, implying revenues around $2.3 billion for YoY growth of ~77%. The company reported data center revenue of $2.34 billion, up 80% YoY.

AMD says the YoY growth was “driven by growth in both AMD Instinct™ GPUs and 4th Gen AMD EPYC™ CPUs,” and the sequential growth was “driven by the first full quarter of AMD Instinct GPU sales, partially offset by a seasonal decline in server CPU sales.” AMD added that MI300 cumulative revenues have surpassed $1 billion since launching in Q4 2023, signaling strong initial adoption and an ability to quickly ramp production.

The CFO guided for next quarter: “Sequentially, we expect data center segment revenue to increase by double-digit percentage, primarily driven by the data center GPU ramp.” Later it was stated: “In the second quarter, we expect overall data center to be up strong double digits.”

An analyst offered verbal math of $900 million for GPU sales next quarter, to which the CFO simply stated she was not guiding to those details. For our purposes, this is a good number to go with. The company called out Microsoft, Meta and Oracle as customers.

Regarding EPYC CPUs, on the call, an analyst stated that his math points toward AMD’s CPU server sales declining 5-6% which is considered strong compared to a competitor (likely Intel). “It looks like your server CPU business was also down at the lower end of the seasonal range. By my math, it was down like 5%, 6% sequentially. Is that right? And that's less than half the decline of your competitor?”

Per the opening remarks: “Given our high core count and energy efficiency, we can deliver the same amount of compute with 45% fewer servers compared to the competition, cutting initial CapEx by up to half and lowering annual OpEx by more than 40%” and also: “We believe we gained server CPU revenue share in the seasonally down first quarter led by growth in enterprise adoption and expanded cloud deployments.”

Client, Embedded, Gaming:

Client segment revenue increased 85% YoY to $1.37 billion, driven predominantly by Ryzen 8000 series processor sales. Revenues declined just (6%) sequentially for the segment.

For Q2, it was stated that Client revenue would increase QoQ.

Per the opening remarks: “Looking forward, we believe the market is on track to return to annual growth in 2024, driven by the start of an enterprise refresh cycle and AI PC adoption. We see AI as the biggest inflection point in PC since the Internet with the ability to deliver unprecedented productivity and usability gains.”

Embedded segment revenue was $846 million, declining (46%) YoY and (20%) QoQ as customer inventory management continued.

For next quarter, the CFO stated Embedded would be flat QoQ, which implies a (47%) decline in Q2. The weakness is coming from automotive, which is widespread.

Gaming revenue was $922 million, declining (48%) YoY and (33%) QoQ “due to due to a decrease in semi-custom revenue and lower AMD Radeon GPU sales.” Looking forward, gaming is expected to decline by a “revenue to decline by significant double-digit percentage.” It was later stated on the call that gaming would be down a “similar zip code” as Q1. In the Q&A, it sounded like this won’t improve this year.

Per the CFO:

“If you look at the gaming, the demand has been quite weak, that's quite very well known and also their inventory level. So based on the visibility we have, the first half both Q1, Q2, we guided down sequentially more than 30%. We actually think the second half will be lower than first half that's basically how we're looking at this year for the gaming business.”

Margins:

Margins for the first quarter were in line with management’s expectations, while Q2’s guide implied a 1 percentage point expansion in adjusted gross margin, driven by an increase in data center mix and lower gaming revenue as gaming has a lower margin than DC.

• GAAP gross margin was 47%, unchanged from Q4 but up 300 bp from 44% in the year ago quarter. Adjusted gross margin was 52%, in line with management’s guidance, and representing a 100 bp QoQ and 200 bp YoY expansion. Increased data center and client revenues and lower gaming revenue aided the margin expansion.
• GAAP operating margin was 1% in Q1, an improvement from (-3%) in the year ago quarter but down from 6% in Q4. Adjusted operating margin was 21%, flat YoY and down 200 bp QoQ.
• On a segment view, data center operating margin was 23.1%, an 1170 bp YoY expansion but a 620 bp QoQ contraction, likely driven by efforts to ramp up MI300 GPU production.
• Notably, the MI300s are lower than the “corporate gross margin” right now but is expected to be above corporate gross margin over time. For full year 2021, the gross margin was 48%, so that’s a good benchmark for a best-case scenario GM.  Per the CFO: “It's the GPU gross margin right now is below the data center gross margin level. I think there are 2 reasons — actually, the major reason is we actually increased the investment quite significantly to, as Lisa mentioned, to expand and accelerating our road map in the AI side, that's one of the major drivers for the operating income coming down slightly. On the gross margin side, going back to your question, we said in the past and we continue to believe the case is. Data center GPU gross margin over time will be accretive to corporate average, but it will take a while to get to the server level for gross margin.”
• GAAP net margin was 2%, an improvement from (1%) in the year ago quarter but down from 11% in Q4. Adjusted net margin was 19%, unchanged from Q4 and up slightly from 18% in the year ago quarter.
• For Q2, management guided adjusted gross margin of 53%, implying a 100 bp QoQ and 300 bp YoY expansion.
• For Q2, adjusted operating margin is expected to be ~21% given management’s guidance for $1.8 billion in operating expenses.

Cash and Debt:

AMD’s cash flow improvements stood out in Q1’s in line report, as the company drove significant double-digit sequential growth in cash flows and margin improvements.

• Operating cash flow was $521 million in Q1, an increase of 7.2% YoY and 36.7% QoQ. Operating cash flow margin was 10%, a 300 bp sequential improvement.
• Free cash flow was $379 million in Q1, an increase of 15.5% YoY and 56.6% QoQ. Free cash flow margin was 7%, a 300 bp sequential improvement.
• AMD reported cash and equivalents of $6.04 billion.
• Debt was unchanged at $2.47 billion.

Earnings Call:

AMD’s AI Revenue Ramp: Glass Half-Full or Glass Half-Empty

AMD is an interesting case of is the glass half-full or is the glass half-empty. Interviews like this one, from an analyst that closely follows the stock, would cause you to believe the glass is half-empty. From the reaction after hours, it would be hard to tell that the primary segment reported 80% YoY growth and is expected to grow strong double digits sequentially.

My take is that the glass is 30% full and will likely exit the year half-full. Per the call, one analyst’s math is for $900M in GPUs next quarter. If we take $2.4 billion for the DC segment this quarter and assume strong double-digit growth, that puts us at a $3B data center segment next quarter (roughly). If this analyst’s math is correct, this means within two quarters of shipping; GPUs will be 30% of DC segment in Q2. I can’t think of another company that has ramped this fast outside of Nvidia. Broadcom has had ASICs revenue for years from Google’s TPUs (maybe 2018-ish) so we aren’t looking at as fast of a ramp there.

AMD is in Nvidia’s shadow with GPU revenue, and understandably so, given Nvidia is commanding a $80B annual data center segment (on its way to a $100B segment). Therefore, AMD stock is up against some hefty investor psychology with its tiny $10B segment (roughly).

However, if we zoom-out, sometime in 2025, CPU revenue will be eclipsed by GPU revenue. We were looking at about a $1.7B-ish segment on CPUs prior to the MI300 release for the Frontier supercomputer in Q4. Whenever GPUs exceed $7B in revenue, they will have officially passed up AMD’s CPUs, which took almost 10 years to build that kind of revenue (first gen EPYC was released in 2014). Meanwhile, AMD’s CPU trajectory resulted in 1700% gains in stock price due to flawless execution against Intel. Meaning, that was a breathtaking 10 years.

Now, I’m not saying this will translate to the exact same gains as the CPU comeback story — but by my estimation, doing what took 10 years in as brief as 2 years (with a long runway to go) should translate to something.

$4B in AI Revenue but Vague as To the Exit Rate

Management left room for a higher exit rate this year in terms of AI revenue. There was nothing said concretely but there were some subtle hints that we will hear a higher exit rate in the coming quarters. This was the most pointed discussion in that regard:

Question
Vivek Arya (Analysts)

Lisa, I just wanted to go back to the supply question and the $4 billion outlook for this year. I think at some point, there was a suggestion that the $4 billion number, right, that there are still supply constraints. But I think at resent point, you said that you have supply visibility significantly beyond that. Given that we are almost at the middle of the year, I would have thought that you would have much better visibility about the back half. So is the $4 billion number of supply constrained number? Or is it a demand constrained number? Or relatively, if you could give us some sense of what the exit rate of your GPU sales could be. I think on the last call, $1.5 billion was suggested. Could it be a lot more than that in terms of your exit rate of MI for this year?

Answer
Lisa Su (Executives)

Yes. Vivek, let me try to make sure that we answered this question clearly. From a full year standpoint, our $4 billion number is not supply capped — I'm sorry, yes, it's not supply cup. It is — we do have supply capability above that. It is more back half weighted. So if you're looking at sort of the near term, I would say, for example, in the second quarter, we do have more demand than we have supply right now, and we're continuing to work on pulling in some of that supply. By the way, I think this is an overall industry issue. This is not at all related to AMD. I think overall, AI demand has exceeded anyone's expectations in 2024. So you've heard it from the memory guys. You've heard it from the foundry guys. We're all ramping capacity as we go through the year. 

And as it relates to visibility, we do have good visibility into what's happening. As I said, we have great customer engagements that are going forward. My goal is to make sure that we pass all of the milestones as we're ramping products. And as we pass those milestones, we put that into the overall full year guidance for AI. But in terms of how customer progression things are going, they're actually going quite well, and we continue to bring new customers on and we continue to expand workloads with our current customers. And so hopefully, that clarifies the question, Vivek.

The Concerning Rumor about Microsoft:

No doubt, the main thing that needed to be cleared was the Microsoft rumor that we detailed in our pre-earnings report. I agree and appreciate the tone of this question, as there is never-ending noise with AMD, and am quoting it in full:

Question
Matthew Ramsay (Analysts)

I appreciate that, Lisa. As my follow-up, a little bit shorter term. And I guess having followed the company super closely for a long time. I think there's been — there's always been noise in the system from whether the stock price is $2 a share or $200, there's been kind of always consistent noise with the other. But the last 1.5 months has been extreme in that sense. And so I wanted to just — I got random reports by inbox about changes in demand from some of your MI300 customers or planned demand for consuming your product. I think you answered earlier about the supply situation and how you're working with your partners there. But has there been any change from the customers that you're in ramp with now or that you soon will be of what their intention is for demand? Or in fact, has that maybe strengthened rather than gone down in recent periods because I keep getting questions about it?

Answer
Lisa Su (Executives)

Sure, Matt. Look, I think I might have said it earlier, but maybe I'll repeat it again. I think the demand side is actually really strong. And what we see with our customers and what we are tracking very closely is customers moving from, let's call it, initial POCs to pilots to full-scale production to deployment across multiple workloads. And we're moving through that sequence very well. I feel very good about the deployments and ramps that we have ongoing right now. And I also feel very good about new customers who are sort of earlier on in that process. So from a demand standpoint, we continue to build backlog as well as build engagements going forward. And similarly, on the supply standpoint, we're continuing to build supply momentum. But from a speed of ramp standpoint, I'm actually really pleased with the progress.

–End quote

My take is that all corporate executives are trained to smooth things over, so we can’t tell from this answer if Microsoft truly canceled orders to some effect or not. But the overall message is that demand outstrips supply.

Conclusion:

If I were to guess, we are hitting up against valuation concerns which are being waved off with conversations on CNBC and elsewhere that AI revenue isn’t materializing fast enough. This simply isn’t true.

However, AMD is expensive — all semis are expensive — and we’ve been here before. This is not our first rodeo when the market doubts a company and comes up with outlandish narratives when it simply hits a valuation ceiling.

Seeing the forest through the trees is important because we need to put our ducks in a row on how to manage our portfolio given these valuations are high, yet these stocks are driving forward a massive market unlike anything we’ve seen before (compare EPYC CPUs ramp to Instinct GPUs ramp — it’s very clear we are in unchartered territory with the growth of AI).

A few weeks ago (and again after hours), AMD retested and broke support for the bullish count of $158. We are looking for AMD to hold $138 and will likely add here. Notably, a break below $128 is more concerning but this report should be enough to avoid that scenario. We will keep you updated in our weekly webinars and with real-time trade alerts as we carefully manage this high-conviction position.

Recommended Reading:

• AMD Q1 Earnings Preview: $3.5B GPU Revenue is the Benchmark
• Super Micro Q3 Pre-Earnings: Puts and Takes for the AI Bullet Train
• Microsoft Fiscal Q3 2024 Earnings: 80% YoY Increase in Capex; Azure AI is Hitting Capacity
• Dell Fiscal Q4: Early Shoots from AI Servers

AMD heads into its fiscal Q1 report with rather high expectations, after management raised FY2024 GPU revenue forecast by 75% last quarter to $3.5 billion plus. Earnings reports last week from Microsoft, Meta and Google reaffirmed a bullish outlook on AI infrastructure spending for 2024, with all three combining for at least $135 billion in capex this year, with management commentary signaling a bulk of that spend will go to data center infrastructure and GPUs.

Therefore, data center revenue and GPU commentary are in focus this report. Yet, it’s key to be objective, and to note for our Members that some analysts are toning down estimates on the data center. Given the channel checks that analysts can do on a company like AMD, the polarized nature of the commentary going into the print tomorrow is interesting. We include analyst commentary below.

As a reminder, just last quarter analysts were setting a very high bar with some pushing for a $6 billion GPU revenue guide for the full year. We are seeing as low as $4 billion and as high as $8 billion. This wide of a range on a key metric is highly unusual, — and investors should be aware, it’ll be nearly impossible for AMD to beat the high-end of the FY expectations for the data center in Q1.

Therefore, it’s important we come up with our own expectations, of sorts. Broadcom is in second place with $1.5B in AI revenue, or $6B annual run rate. Due to analysts muddying the water a bit here on what is reasonable for a Q1 discussion on the call tomorrow, I think a decent goal (and win) would be for AMD to have GPU revenue equal to 2023 data center revenue by the time we exit the year, which was $6B. This number is also in line with AVGO’s current AI revenue and is the midpoint of analyst estimates.

Revenue and EPS:

• Q1 revenue was guided to be $5.4 billion, +/- $300 million, for YoY growth of approximately 0.9% and a QoQ decline of (12.5%). Analysts are expecting slightly higher revenues of $5.45 billion for YoY growth of 1.9%. As you can see above, Q1 should mark the bottom with a strong ramp into Q1 of next year.
• Q1’s adjusted EPS is estimated to be $0.61, for YoY growth of 1.3%. Adjusted EPS growth is expected to accelerate to 90% by Q1 of next year.

Q2’s guide will be important to track. Susquehanna noted Monday, after lowering its price target, that it is “expecting in-line to slightly weaker guidance as Server/PC/XLNX/Gaming continue to weigh.” Q2 revenue is currently estimated to be $5.69 billion for YoY growth of 6.2%.

Key Segments:

Data Center: AMD guided for Q1 data center revenue to be approximately flat QoQ, implying revenues of $2.3 billion for YoY growth of ~77%. This is due to “a seasonal decline in server sales offset by a strong Data Center GPU ramp.”

Data center revenue, and more importantly, MI300 revenue is likely to be the most critical aspect of Q1’s report and Q2’s guide, as analysts are simultaneously resetting and increasing expectations for MI300 revenues in April. This will be discussed in more detail in the section “MI300 GPU Sales in Focus” below.

For the full year, management said “the largest incremental revenue opportunities are going to come from Data Center between both the server side gaining more share, and Data Center GPU side with the significant ramp up of our MI300.”

Client, Embedded, Gaming: AMD guided for Client, Embedded and Gaming segment sales to “decline sequentially, with semi-custom revenue expected to decline by a significant double-digit percentage.”

Margins:

Adjusted gross margin is guided to be 52% in Q1, a 120 bp QoQ expansion as data center mix increases.

Adjusted operating margin is expected to be 20%, a ~300 bp QoQ contraction and the lowest level in three quarters. However, data center operating margin has expanded significantly over the past two quarters, from 19.1% in Q3 to 29.2% in Q4. For context, DC generated $666 million in operating income in Q4, up 118% QoQ and the most of any of AMD’s segments.

CFO Jean Hu shed more light on both the trajectory of margins and DC margin in Q1 and the rest of the year:

“We guided the Q1, 120 basis points higher than Q4 sequentially, primarily because the higher Data Center contribution actually more than offset the decline of Embedded business in Q1. Going forward, the way to think about it is as you said is the major driver is going to be Data Center business is going to grow much faster than other segment. That mix change will help us to expand the gross margin nicely. I think you also are spot on, the Embedded coming back in second half, which will be a tailwind. With the Data Center GPU, we are at the very early stage of ramp. We are improving testing time yield and continue to expand gross margin and we expect to be accretive to corporate average. So, those are all the tailwinds coming in the second half. I would say the headwinds side continue to be in the first half where we see Embedded business not only Q1 we see sequential decline, Q2 probably are going to be sequentially flattish versus Q1.”higher Data Center contribution actually more than offset the decline of Embedded business in Q1. Going forward, the way to think about it is as you said is the major driver is going to be Data Center business is going to grow much faster than other segment. That mix change will help us to expand the gross margin nicely. I think you also are spot on, the Embedded coming back in second half, which will be a tailwind. With the Data Center GPU, we are at the very early stage of ramp. We are improving testing time yield and continue to expand gross margin and we expect to be accretive to corporate average. So, those are all the tailwinds coming in the second half. I would say the headwinds side continue to be in the first half where we see Embedded business not only Q1 we see sequential decline, Q2 probably are going to be sequentially flattish versus Q1.”

Cash and Debt:

AMD reported operating cash flow of $381 million in Q4 for a margin of 6.1%, and FY23 OCF was $1.67 billion for a 7.4% margin. Free cash flow was $242 million in Q4 for a margin of 4%, and FY23 FCF was $1.12 billion for a 4.9% margin.

Operating cash flow growth is expected to unfold as one of the larger fundamental recoveries in 2024. Current estimates point to nearly 277% YoY growth in OCF to $6.28 billion, or a margin in the 24% range based on current revenue estimates of $25.7 billion for the year.

AMD has $5.77 billion in cash and equivalents on hand, and total debt of $2.47 billion.

MI300 GPU Sales in Focus

As noted earlier, AMD’s MI300 GPU revenue outlook for the full year will be the most important data point coming out of Q1’s report, after AMD increased its outlook by 75% last quarter.

Analysts are hinting towards possible weakness in Q1 due to rumors of Microsoft cutting some orders, though other analysts are expecting full year GPU revenue of $8B, more than double AMD’s guide. This is setting up an interesting scenario in which even if AMD surprises with better-than-expected GPU revenue in Q1, the full year picture may still disappoint against outsized expectations for $4.5B+ all the way to $8B.

Here’s some recent analyst commentary and updated expectations for GPUs:

• Susquehanna analyst Christopher Rolland said it is likely that “upward revisions to the MI300 are ‘necessary’ for the stock to move higher, especially as investor sentiment has cooled” following Nvidia’s GTC conference. “Buy-side expectations for the MI300 are as high as $8B, while Rolland estimates revenue from the MI300 for this year at around $5B.”
• Deutsche Bank “believes the most anticipated aspect of the quarter will be any update to the company's 2024 outlook for MI300 revenues. On this metric, it thinks buy-side expectations have recently fallen on the back of suspected order cancellations by Microsoft, which are yet to be substantiated, but still are likely at a minimum of $4B.”
• TD Cowen is expecting strength in the data center and “increased its MI300 2024 revenue estimate to $4.5B from $4B, saying ramps at several customers will continue to happen more quickly than typical.”
• HSBC says that “market expectations for the company's MI300 2024 and 2025 revenue have been reset,” but thinks AMD “has enough supply capacity and demand to surpass management's artificial intelligence revenue guidance” for the year.
• Baird believes “MI300X orders have been cut by a U.S. hyperscaler recently,” saying that the “magnitude of the initial order suggests it was a multi-year agreement, but it does not know whether the cut is due to market share shift or the hyperscaler scaling down to numbers more in line with shipment expectations.” Baird also “continues to believe there is ‘comfortable upside’ in AMD's artificial intelligence revenue guidance for this year, based on high-bandwidth memory order visibility.”
• Wells Fargo analyst Aaron Rakers says the “focus on AMD is squarely on upside related to its MI300X accelerator chips,” and sees “a path towards AMD generating $8B in revenue from the MI300 (up from $3.5B to $4B), and wonder if there is a recovery in the traditional server market and an ‘underappreciated’ story in market share gain.” Rakers adds that concerns over Microsoft’s order cuts are “too narrowly cited."

While rumors for Microsoft’s order cuts are yet to be substantiated, there are further notes discussed on the site Tom’s Hardware that Microsoft is reportedly able to purchase MI300 GPUs at a 33% discount, at approximately $10,000 per GPU compared to a $15,000 price tag for other customers. This could present a margin headwind in Q1 should Microsoft account for a majority of GPU shipments in the quarter due to the pricing discrepancies.

In the bigger picture, to meet the lowest end of analysts’ GPU revenue estimates of $4 billion and $4.5 billion, AMD would need to boost its forecast by 15% to 30% — the question here is whether management has enough visibility after one quarter to confidently raise its full-year outlook to that extent after raising it by 75%.

Big Tech Capex Commentary

Capex commentary from Big Tech last week was directionally bullish, with Microsoft, Meta and Alphabet expecting to spend upwards of $135 billion this year, predominantly on AI infrastructure. This sets up a positive long-term picture for AMD to increase market share against Nvidia among the major hyperscalers, given AMD’s GPUs are available, can compete on performance, and undercut on price.

Microsoft increased its capex 80% YoY to $14 billion this quarter, and for the entire fiscal year, capex will increase approximately 50% YoY to more than $50 billion. Demand for Azure’s AI services is outpacing its capacity in the near-term, hence the need for Microsoft to accelerate spending to boost GPU supply.

Meta boosted its full year capex range to $35-40 billion, up from $30-37 billion, to build out AI infrastructure and support its internal AI roadmap. However, Meta’s Q1 capex was only $6.7 billion, implying that the bulk of this spend will hit in the second half of the year and accelerate into 2025. By the end of 2024, Meta is aiming to have 350,000 H100 GPUs and 600,000 total GPUs including H100 equivalents, leaving ~250,000 GPUs split between its custom processors and AMD’s MI300. Assuming AMD can capture 50% of that remaining 250K units, MI300 revenue to Meta may surpass $1.8 billion this year.

Alphabet’s capex rose 91% YoY to $12 billion in Q1, primarily for technical infrastructure – this capex spend was led by servers and followed by data centers. Management is expecting quarterly capex “to be roughly at or above the Q1 level,” implying a full-year capex around $50 billion.

Overall, the planned capex outlays and management commentary from the trio is ultimately bullish. Meta’s Q1 spend declined ~$300 million YoY, and was low compared to its full year forecast, and rumors for Microsoft’s order cuts can’t entirely be shrugged off. As such, there is a chance that Q1’s data center and MI300 sales come in light before finding strength in the back half of the year.

AMD Count and Game Plan

By Knox Ridley

This is the bullish count we’re following, and it’s the best interpretation higher given the price information. Here’s what we would guess based on the current technicals: we get a final drop into the $138 region, which will get bought, and then we push higher. If this is going to happen, we must hold $128. Below here and we could see a bigger drawdown take hold, as the below path higher will get invalidated.

Look at the red arrow in the chart above. That’s indicating a 3-wave bounce, which is usually corrective (suggesting lower). This is happening on momentum making a higher high with price making a lower high (common in downtrends). However, I think that what is missing is the final 5th wave lower before reversing. This is a very stretched downtrend pattern, so we should see a reversal soon.

Look for us to buy around $138 on a pullback or around $174 if we get a breakout. If price breaks below $128, we will risk manage the position. (Note: real-time trade alerts and weekly webinars reviewing IOF positions are offered for Advanced Members)

Insiders Activity

Since February of 2024, we’ve seen about $95M of insider sells. Lisa Su was about $50M of this total. Forrest Norrod and Victor Peng also had sales above $10M. The CTO sold about $8M. This is the largest cluster of sales since December of 2021. The synchronicity of four top tier execs, two on the same day, is not my favorite thing to see. We collect these details to help inform our decision if the stock should break a key level.

Conclusion

AMD’s Q1 report is one of the most highly anticipated reports of the quarter as the company is battling both lowered near-term estimates and heightened long-term expectations for GPU revenue. Analyst estimates on MI300s range from $4 billion to $8 billion.

AMD’s fundamentals are expected to improve throughout the year as data center sales accelerate, with operating cash flow growth of nearly 277% on top of an acceleration in EPS growth to the 90% range by the first quarter next year. We’re continuing to track Big Tech’s capex for signs on AI spending, and so far, there’s indications that spend will continue to increase for multiple quarters, leaving time for AMD to gain share.

Analyst estimates are showing a sizable rebound in H2. Let’s see what management says. Stay tuned for our post-earnings report in your inboxes tomorrow night.

Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis

Recommended Reading:

• Q2 2024 Earnings Kickoff Webinar Replay
• Super Micro Q3 Pre-Earnings: Puts and Takes for the AI Bullet Train
• Lam Research Fiscal Q3 Earnings: A Tad Early to the 2025 Rebound
• AI's Opportunity: Growth, Investment, and the Future

Micron delivered an exceptional fiscal Q2, with revenue rising nearly 58% as strong AI demand led to pricing power coupled with tight supply dynamics to accelerate its return to profitability this quarter. Q3 was guided 10% above consensus to $6.6 billion at midpoint, representing 76% YoY growth, pointing to an impressive rebound from declining growth just three quarters ago.

Margins were significantly ahead of expectations, driving a strong shift to profitability. Micron was initially expected to return to profitability next quarter, but reported a solid 13.6% GAAP net margin this quarter as operating margin expanded nearly 20 percentage points QoQ.

CEO Sanjay Mehrotra said Micron’s “preeminent product portfolio positions us well to deliver a strong fiscal second half of 2024,” as he believes the company “is one of the biggest beneficiaries in the semiconductor industry of the multi-year opportunity enabled by AI.”

There were many strong, bullish statements on the call: “AI server demand is driving rapid growth in HBM, DDR5 and data center SSDs, which is tightening leading-edge supply availability for DRAM and NAND. This is resulting in a positive ripple effect on pricing across all memory and storage end markets. We expect DRAM and NAND pricing levels to increase further throughout calendar year 2024 and expect record revenue and much improved profitability now in fiscal year 2025.”

For more information regarding the importance of HBM3 and HBM3e in Nvidia and AMD’s 2024 product road map for AI Accelerators, please reference our past analysis noted at the end of this analysis.

Revenue and EPS:

Revenue shows a clear and obvious rebound in the memory market and EPS was a blowout:

• Revenue of $5.82 billion beat estimates by ~9%, and represented YoY growth of 58% and QoQ growth of 23%.
• Fiscal Q3 revenue was guided at $6.6 billion, +/- $200 million, for YoY growth of 76% and QoQ growth of 13%.
• GAAP EPS was $0.71, compared to estimates for ($0.38). This compares to GAAP EPS of ($1.12) in Q1 and ($2.12) in the year ago quarter.
• Adjusted EPS was $0.42, compared to estimates for ($0.24). This compares to adjusted EPS of ($0.95) in Q1 and ($1.91) in the year ago quarter.
• GAAP EPS was guided at $0.17 +/- $0.07, compared to estimates for $0.08.
• Adjusted EPS was guided at $0.45 +/- $0.07, compared to estimates for $0.20.

Margins:

• GAAP gross margin was 18.5%, an expansion of 5120bp YoY from (-32.7%) and 1920bp QoQ from (0.70%). Management had guided for a gross margin of 12%.
• Adjusted gross margin was 20.0%. Gross margins “benefited from $382 million associated with selling the remainder of previously written-down inventories.”
• GAAP operating margin was 3.3%, an expansion of 6570bp YoY from (-62.4%) and 2720bp QoQ from (-23.90%). Management had guided for (-8.2%). Adjusted operating margin was 3.5%.
• GAAP net margin was 13.6%, an expansion of 7620bp YoY from (-62.5%) and 3970bp QoQ from (-26.1%). Adjusted net margin was 8.2%.

•  For Q3, GAAP gross margin was guided at 25.5% +/- 1.5%, an expansion of 700bp QoQ at midpoint. Adjusted gross margin was guided at 26.5% +/- 1.5%. Despite the rather large benefit in Q2 from selling written-down inventories, strong increases in DRAM and NAND pricing are driving this sequential expansion.
• For Q3, GAAP operating margin is implied to be 8.7% at midpoint, an expansion of 540bp QoQ. Adjusted operating margin is implied to be 11.5%, an expansion of 800bp QoQ. Micron is forecasting continued operating income through the rest of FY24.

Management made it crystal clear that HBM3 is accretive to margins. This has been a concern since it’s 3X more expensive to manufacture. The strength in the margin is due to pricing power.

“So with respect to the accretive nature of HBM, look, HBM carries a higher cost, but it also carries a significantly higher pricing because it brings such great value in the applications in terms of its performance and power. And we are executing well. Our yield ramp is going well as well according to plan.”

“And therefore, we are pleased that in this quarter, when we have begun our production shipments, we will be having it accretive to our gross margins in the quarter. And of course, this momentum will continue to build in the quarters ahead.”

“Answer
Mark Murphy (Executives)

Yes. Brian, it's Mark. We won't break it out specifically, but maybe just to give you a sense of the trajectory of gross margins. The increase from first quarter of 1% to 20% in the second quarter was dominantly price. And obviously, a lot of other things going on, but the dominant feature of that increase was price. 

Likewise, in the 20% second quarter actuals to the 26.5% guide, price remains the largest contributor. And offsetting part of that is, of course, what CJ mentioned on the benefit of those lower cost inventories fade away. So — but price is still the largest factor.”

Cash and Debt:

• Cash and short-term investments totaled $9.0 billion.
• Debt totaled $13.7 billion.
• Operating cash flow was $1.22 billion, an increase of 256% YoY but a decrease of (13% QoQ). The sequential decrease may have been impacted by strong pre-payments in the prior quarter from customers aiming to secure supply. Management commented last quarter there were $600 million in prepays but declined to comment on prepays this quarter.
• Adjusted free cash flow was ($29 million), compared to adjusted FCF of ($333 million) in Q1 and ($1.81 billion) in the year ago quarter. Micron is expecting to generate positive adjusted FCF in both Q3 and Q4.

Key Metrics:

• DRAM revenue was $4.2 billion, an increase of 21% QoQ. DRAM pricing increased by the high-teens QoQ. DRAM had increased 24% QoQ in the previous quarter, so this was the second quarter of strong DRAM growth which we covered here.
• NAND revenue was $1.6 billion, an increase of 27% QoQ. NAND pricing increased by more than 30% QoQ, offsetting a low single-digit QoQ decrease in bit shipments.
• Compute and Networking (CNBU) revenue was $2.19 billion, representing an increase of 26% QoQ and 59% YoY. Per mgmt comments: “Data center revenue grew robustly, and cloud more than doubled sequentially.”
• Mobile (MBU) revenue was $1.6 billion, representing an increase of 24% QoQ and 69% YoY. Per management comments: “an expected decline in volume was more than offset by improved pricing” and management confirmed mobile will recover this year: “Smartphone unit volumes in calendar 2024 remain on track to grow low to mid-single digits.”
• Embedded (EBU) revenue was $1.1 billion, representing an increase of 7% QoQ and 28% YoY.
• Storage (SBU) revenue was $905 million, representing an increase of 39% QoQ and 79% YoY. Per management comments: “Data center SSD revenue more than doubled from a year ago driven by share gains from Micron's products.”

Revenue Acceleration Strongly Underway

Fiscal Q2 reaffirmed that Micron’s revenue acceleration is strongly underway, as revenue and Q3’s guide came in well above expectations. Micron added that they are expecting to generate record revenue with “much improved” profitability in fiscal 2025. 

Fiscal Q3’s guidance would mark the highest quarterly revenue in seven quarters, coming in above $6 billion for the first time since the fourth quarter of fiscal 2022. This is driving the fastest acceleration that we have seen for Micron since late 2017.

Q3 is expected to see ~76% YoY revenue growth at midpoint, a 18 percentage point acceleration from Q2 and a 61 percentage point acceleration from when revenue inflected back to positive growth in Q1. However, it’s important to note that these YoY growth rates are viewed against extremely weak comps – the real test for the strength and scale of this acceleration will be fiscal 2025’s growth rates; for example, how close each quarter can stay to the 60% expected revenue growth in fiscal Q1 2025.

An improved pricing environment driven by AI server demand is aiding the revenue growth story. Micron said it was able to drive “robust price increases as the supply-demand balance tightened.”

In particular, AI server demand was seen “driving rapid growth in HBM, DDR5 (D5) and data center SSDs, which is tightening leading-edge supply availability for DRAM and NAND.” Micron said this is causing “a positive ripple effect on pricing across all memory and storage end market.” As a result, Micron is expecting prices to continue to increase through 2024 and into 2025.

Management expressed how unusual the demand for HBM3 is: “And 2024 volume as well as pricing is all locked up. 2025, as I mentioned, the volumes are largely allocated. A vast majority of our production supply is allocated, and some of the pricing is already firmed up. Keep in mind, this has never happened before, right, that we are talking about 2025, and we are sitting in CQ1, and we already have so much discussion around supply and pricing for 2025 getting locked up here as we speak.”

Tight Supply:

Once semiconductor segments are aligned in terms of a rebound, the impact from AI will be more evident. Inventory helps to foreshadow the strength of the rebound.

This is what management stated: “Inventories for memory and storage have improved significantly in the data center, and we continue to expect normalization in the first half of calendar 2024. In PC and smartphone, there were some strategic purchases in calendar Q4 in anticipation of a return to unit growth. Inventories remain near normal levels for auto, industrial and other markets.”

The words “tight supply” were repeated 7 times, which tends to translate to strong pricing power. Here are a few of the comments, which are important to note as the tone of the call was that this pricing power should only increase:

“We anticipate strong HBM demand due to AI, combined with increasing silicon intensity of the HBM road map, to contribute to tight supply conditions for DRAM across all end markets.”

“The trade ratio of 3:1, increasing demand in HBM, increased profitability of HBM is putting a non-HBM part of the memory in tight supply. This is why we say that leading-edge nodes are in very tight supply. And as a result, we would fully expect that D5 as well as other DDR products will improve in their profitability picture as well, given they're very much tight supply there.”

“And so, I mean, this overall tight supply environment bodes well for our ability to manage the pricing increases as well as keep an eye on demand-supply balance and remain extremely disciplined in driving the growth of our business in revenue and profits while continuing to execute our strategy of maintaining stable bit share.”

Note on HBM3e Progress

Micron’s HBM3e was a core part of our multi-faceted AI-driven growth thesis in December, and the company has provided positive updates on HBM3e development and revenue generation.

Management said “we commenced volume production and recognized our first revenue from HBM3E in fiscal Q2 and now have begun high-volume shipments of our HBM3E product.” The company is “on track to generate several hundred million dollars of revenue from HBM in fiscal 2024.”

Micron is expecting these HBM revenues “to be accretive to our DRAM and overall gross margins starting in the fiscal third quarter.” This is an important quote – Micron has already driven tremendous improvement in gross and operating margins in Q2, and this implies that HBM pricing power provided a tailwind to margins. Moving beyond fiscal Q3 and Q4 and into fiscal 2025, margins are expected to continue to expand at a fairly strong rate as HBM revenues ramp significantly.

Micron shed light on customers and capacity, noting that while its HBM3e will be a part of Nvidia’s H200 Tensor Core GPU, it is “making progress on additional platform qualifications with multiple customers.”

Micron’s upcoming 12-high HBM3e has been sampling to customers, and Micron said it will begin ramping the cube in high volume production throughout 2025: “Earlier this month, we sampled our 12-high HBM3E product, which provides 50% increased capacity of DRAM per cube to 36 gigabytes. This increase in capacity allows our customers to pack more memory per GPU, enabling more powerful AI training and inference solutions. We expect 12-high HBM3E will start ramping in high-volume production and increase in mix throughout 2025.”

Nvidia’s H200 win is major win for Micron, as competition in the HBM landscape remains stiff. Per management: “NVIDIA announced its next-generation Blackwell GPU architecture-based AI systems, which provides a 33% increase in HBM3E content, continuing a trend of steadily increasing HBM content per GPU. Micron's industry-leading high-bandwidth memory HBM3E solution provides more than 20x the memory bandwidth compared to standard D5-based DIMM-server module.”

Market leader SK Hynix, who had shipped HBM for Nvidia’s H100, is investing at least $1 billion this year to improve stacking and yields for HBM3/3e, while Nvidia just confirmed that it is qualifying Samsung’s HBM for next-gen GPUs.

While it is not certain that Samsung will pass the qualification stage, it raises questions whether this qualification is for the B200 or another upcoming GPU, or whether Nvidia is seeking to qualify HBM products from all three manufacturers in order to secure ample supply in 2025 and 2026 (given that Micron’s capacity is nearly booked and SK Hynix just commenced HBM3e mass production).

Per Micron, the following sets them apart: “Customers continue to give strong feedback that our HBM3E solution has a 30% lower power consumption compared to competitors' solutions. This benefit is contributing to strong demand.”

Though it is rumored that SK Hynix is shipping to Nvidia’s Blackwell lineup, Micron raises a critical point: the architecture “provides a 33% increase in HBM3E content, continuing a trend of steadily increasing HBM content per GPU.” This trend for higher memory content to support larger and faster GPUs is likely to continue especially as chipmakers such as AMD work quickly to encroach on Nvidia’s share with comparable or faster GPUs.

Additional Growth Opportunities

HBM3e is stealing the spotlight but it’s worth mentioning a few additional growth opportunities for Micron:

• The company is releasing a 128-gigabyte server DRAM module that will provide high bandwidth D5 capability and greater than 20% energy efficiency with 15% better latency compared to Samsung’s 3D TSV solutions. This product has “strong customer pull” with “several hundred million dollars of revenue in the second half of fiscal 2024.”
• Micron reported record revenue share in the data center SSD market last year. In the current quarter, MU grew revenue by 50% QoQ for the 232-layer based 6500 30 terabyte SSDs. These are used for AI data lake applications.
• Edge AI – PCs will be a growth market for Micron. As stated above, mgmt expects PCs to return to growth in CY2024 in the “low single-digit range.” The neural processing units (NPU) chipsets that AI PCs require will see 40% to 80% more DRAM content than non-AI PCs.
• Edge AI – AI phones will require 50% to 100% more DRAM content than non-AI phones.

Conclusion:

A company that is supplying Nvidia (and likely AMD, perhaps Broadcom) on critical memory components for GPUs this year, HBM3E, plus will afford us an early entry for Edge AI with spring-loaded margins and strong pricing power that is expected to increase? Yes, please.

I’m quite positive you will see a new buy alert on Micron tomorrow and we are also looking at entering Lam Research (see below for LRCX analysis).

The report tonight has many implications for a thesis we have been carefully building on a memory rebound, which with some careful risk management, should have a long runway with Edge AI up to bat next (2025).

A special thank you to my team of analysts – Damien, Royston and Knox — who have worked diligently to identify this thesis. Go team go.

Resources:

• 2024 Trend: Memory and PC Rebound
• Memory and PC Stocks Review
• Micron: AI Offers a Multifaceted Secular Growth Tailwind
• Micron Q1: The Memory Rebound has Arrived Fueled by HBM3e – notes on anticipated NVDA partnership
• Micron Q2 Pre-Earnings: Signs of Rebound
• Lam Research: Wafer Fab Equipment Leader & HBM/DRAM Memory
• AMD is Ready to Rival on AI Acceleration – notes on upcoming GPUs with HBM3 memory

Nvidia’s much-anticipated Q4 earnings report saw the AI GPU leader post another large beat and raise as it reported revenue growth of 265% YoY. Nvidia guided fiscal Q1 revenues nearly $2 billion above consensus on top of its almost $2 billion revenue beat in Q4, mirroring what we saw in Q3 as demand for its H100 Hopper GPUs remains elevated.

The consistency and magnitude of the top-line beats is impressive, with Q1’s guide signaling three quarters in a row of revenue growth above 200%. However, it’s the growth further down the income statement where Nvidia’s report truly shines. Nvidia’s stronghold grip on the data center market at the moment combined with pricing power and elevated demand for its H100 GPU has allowed substantial growth in operating income and has generated robust earnings.

Read our pre-earnings write-up here.pre-earnings write-up here.

Revenue and EPS:

• Q4 revenue was $22.1 billion, beating estimates by 7.56%. This represented YoY growth of 265%, a 60 percentage point acceleration from 205% YoY in Q3.
• FY24 revenue was $60.92 billion, an increase of 126% YoY. 
• Q1 revenue was guided at $24 billion, +/- 2%, ahead of estimates for ~$21.9 billion. This represents YoY growth of 235%, or a 30 percentage point deceleration from Q4’s growth rate. We had covered in our pre-earnings write up that revenue growth will peak in Q4 for now at the 265%. This seems to still be the case unless next quarter comes in at $2.2 billion over the current guide. As we have seen these past few quarters, it’s not out of the question that Nvidia beats by this much next quarter. However, it’s looking less likely that Nvidia can sustain this peak growth as we move into the second half of the year.
• Q4 GAAP EPS of $4.93 beat estimates by 16.8%, representing YoY growth of 765%.
• Q4 adjusted EPS of $5.16 beat estimates by 11.2%, representing YoY growth of 486%.

Margins:

Nvidia’s Q4 report highlighted the incredibly strong leverage and margin expansion that the rapid growth in the data center is driving.

• GAAP gross margin was 76% in Q4, and adjusted gross margin was 76.7%, an expansion of 1270 and 1060 bp YoY respectively. 
• GAAP operating margin was 61.6% in Q4, and adjusted operating margin was 66.7%, an expansion of 4080 and 2990 bp YoY respectively.
• GAAP net margin was 55.6% in Q4, and adjusted net margin was 58.1%, an expansion of 3320 and 2220 bp YoY respectively.

Notably, Nvidia is guided “Beyond Q1, for the remainder of the year, we expect gross margins to return to the mid-70s percent range.” It was mentioned on the call that the slightly softer gross might be caused by the higher cost of HBM3.

• For FY24, GAAP gross margin was 72.7% up from 56.9% in FY23. Adjusted gross margin was 73.8% up from 59.2% in FY23.
• For FY24, GAAP operating margin was 54.1% up from 15.7% in FY23. Adjusted operating margin was 60.9% up from 33.5% in FY23.
• For FY24, GAAP net margin was 48.9% up from 16.2% in FY23. Adjusted net margin was 53% up from in FY23. 

Cash Flows:

• Cash on hand was $26.0 billion, an increase from $18.3 billion in Q3 and $13.3 billion in the year ago quarter.
• Operating cash flow was $11.5 billion in Q4, an increase of 411% YoY. FY24 operating cash flow increased 416% YoY to $28.1 billion. For FY24, operating cash flow more than doubled to 46.1%, compared to 20.9% in FY23.
• Free cash flow was $11.2 billion in Q4, an increase of 546% YoY as FCF margin topped 50%. For FY24, free cash flow increased 618% YoY to $26.9 billion. Free cash flow margin more than tripled to 44.2% from 13.9% last year.
• Debt totaled $10.95 billion.

Key Segments:

Data Center:

Data center revenue dazzled again, with Nvidia attributing the growth to “higher shipments of the NVIDIA Hopper GPU computing platform” alongside growth for InfiniBand. Revenues rose 409% YoY and 27% QoQ to $18.4 billion – in other words, a $3.9 billion increase from Q3. Nvidia generated $47.5 billion in data center revenues in FY24, up 217% YoY from $15 billion in FY23.

This is what they mean by “hockey stick” growth:

To put just how rapid this ascent in data center revenues has been, this year’s $47.5 billion in revenue is 18% more than total revenues in the segment for the past five years combined – Nvidia generated $40.2 billion in data center revenue between FY18 through FY23.

According to the CFO commentary on the call for next quarter: “We expect sequential growth in data center and ProViz, partially offset by seasonal decline in Gaming.” As our pre-earnings writeup pointed out, a few analysts were modeling $25 billion data center quarters (for $100 billion per year), so it makes sense that we will see sequential growth in the data center into the foreseeable future.

The CFO also stated that 40% of data center revenue is from inference. This is the first I remember management discussing the percentage that is from inference, and I believe that’s because AMD is pushing hard on the narrative that the MI300s will specifically outperform on inference.

Regarding China, the following was stated: “Growth was strong across all regions except for China, where our Data Center revenue declined significantly following the U.S. government export control regulations imposed in October. Although we have not received licenses from the U.S. government to ship restricted products to China, we have started shipping alternatives that don't require a license for the China market. China represented a mid-single-digit percentage of our Data Center revenue in Q4, and we expect it to stay in a similar range in the first quarter.”

Gaming:

Gaming revenue in Q4 was $2.9 billion, representing a 56% YoY increase against a softer comp and flat growth QoQ. FY24 revenue was $10.4 billion, up 15% YoY.

Pro Viz

Pro Visualization revenue in Q4 was $463 million, up 105% YoY and 11% QoQ. FY24 revenue in the segment was $1.6 billion, up 1% YoY.

Automotive:

Automotive revenue was $281 million in Q4, up 8% QoQ but down 4% YoY. FY24 revenue was $1.1 billion, up 21% YoY as more automakers in China adopt Nvidia’s Drive platform for autonomous driving capabilities.

Additional Notes:

Nvidia’s rapid top-line growth is the primary eye-catching statistic, as no other companies in tech can report such blistering revenue growth at a rate above 200% for multiple quarters at an annualized revenue rate near $90 billion. However, the strengths of Nvidia’s report lie within the operating leverage that this growth is driving.

Operating income in Q4 increased 983% YoY to $13.6 billion, driving a 769% increase in net income to $12.3 billion.

For the full year, operating income of 681% to nearly $33.0 billion, up from $4.2 billion in FY23, while net income rose 581% YoY to $29.8 billion from $4.3 billion in FY23. FY24’s GAAP EPS of $11.93 was nearly 6x higher than FY23’s $1.74.

Cash flow generation surged, with OCF margin more than doubling and FCF margin tripling in FY24. OCF and FCF have increased sequentially each quarter this year, as top-line growth is flowing directly through to the bottom line.

Earnings Call:

There wasn’t much to dissect in the earnings call as what was delivered was another blowout quarter. However, there were some questions on supply that I want to note here. It’s no secret that demand is greater than supply, hence these blowout quarters. It did seem analysts were poking holes at what the timing could be as to when supply won’t be able to continue to afford this extraordinary growth. The answers to the questions were not very informative, rather I’m noting that this seems to the be predominant concern among the analysts even if management chose to remain vague.

Question
Stacy Rasgon (Analysts)

I wanted to — Colette, I wanted to touch on your comments that you expected the next generation of products, so that black well [B100s] to be supply constrained. Can you dig into that a little bit? What is the driver of that? Why does that get constrained as Hopper is easing up? And how long do you expect that to be constrained? Like do you expect the next generation to be constrained like all the way through calendar '25? Like when do those start to ease?

Answer
Jensen Huang (Executives)

Yes. The first thing is overall, our supply is improving. Overall, our supply chain is just doing an incredible job for us. Everything from, of course, the wafers, the packaging, the memories, all of the power regulators to transceivers and networking and cables, and you name it, the list of components that we ship […] The supply chain is really doing fantastic supporting us. And so overall, the supply is improving. We expect the demand will continue to be stronger than our supply provides, and through the year and we'll do our best. The cycle times are improving and we're going to continue to do our best. However, whenever we have new products, as you know, it ramps from 0 to a very large number, and you can't do that overnight. Everything is ramped up. It doesn't step up. And so whenever we have a new generation of products and right now, we are ramping H200s, there's no way we can reasonably keep up on demand in the short term as we ramp […] So we'll — with all new products, demand is greater than supply. And that's just kind of the nature of new products, and we work as fast as we can to catch up with the demand. But overall, net-net, overall, our supply is increasing very nicely.”

Here was another question on supply that was shrugged off, so to speak, yet helps our Members to understand the Q&A had a few analysts focused on figuring out the supply constraints:

Question
Timothy Arcuri (Analysts)

I wanted to ask about how you're converting backlog into revenue. Obviously, lead times for your products have come down quite a bit. Colette, you didn't talk about the inventory purchase commitments, but if I sort of add up your inventory plus the purchase commits and your prepaid supply, sort of the aggregate of your supply, it was actually down a touch. How should we read that? Is that just you saying that you don't need to take as much of a financial commitment to your suppliers because the lead times are lower? Or is that maybe you're reaching some sort of steady state where you're closer to filling your order book and your backlog?

Answer
Colette Kress (Executives)

Yes. So let me highlight on those three different areas of how we look at our suppliers. You're correct. Our inventory on hand, given our allocation that we're on, we're trying to, as things come into inventory, immediately work to ship them to our customers. I think our customer appreciates our ability to meet the schedules that we've looked for.

The second piece of it is our purchase commitments. Our purchase commitments have many different components into it, component that we need for manufacturing but also often we are procuring capacity that we need. The length of that need for capacity or the length of the components are all different. Some of them may be for the next 2 quarters but some of them may be for multiple years. I can say the same regarding our prepaids. Our prepaids are predesigned to make sure that we have the reserve capacity that we need as several of our manufacturing suppliers as we look forward.

So wouldn't read into anything regarding approximately about the same numbers as we are increasing our supply. All of them just have different lengths as we have sometimes had to buy things in long lead times or things that need a capacity to be built for us.”

There was an important question about that pertains to our thesis that Nvidia will become a predominant player for AI software. Right now, software is at a $1 billion run rate. The comment below was the first that I can recall where the CEO was more detailed as to how Nvidia will become a force in AI software. I’m quoting it in full here as a follow up to our deep dive on AI software in July of 2022:

Answer
Jensen Huang (Executives)

Let me take a step back and explain the fundamental reason why NVIDIA will be very successful in software. […] If you don't have software, you can't open new markets. If you don't have software, you can't open and enable new applications. Software is fundamentally necessary for accelerated computing. This is the fundamental difference between accelerated computing and general-purpose computing that most people took a long time to understand. And now people understand that software is really key.

And the way that we work with CSPs, that's really easy. We have large teams that are working with their large teams. However, now that generative AI is enabling every enterprise and every enterprise software company to embrace accelerated computing, and when it is now essential to embrace accelerated computing because it is no longer possible, no longer likely anyhow, to sustain improved throughput through just general-purpose computing, all of these enterprise software companies and enterprise companies don't have large engineering teams to be able to maintain and optimize their software stack to run across all of the world's clouds and private clouds and on-prem.

So we are going to do the management, the optimization, the patching, the tuning, the installed base optimization for all of their software stacks. And we containerize them into our stack called NVIDIA AI Enterprise. And the way we go to market with it is think of that NVIDIA AI Enterprise now as a run time like an operating system. It's an operating system for artificial intelligence. And we charge $4,500 per GPU per year. And my guess is that every enterprise in the world, every software enterprise company that are deploying software in all the clouds and private clouds and on-prem will run on NVIDIA AI Enterprise, especially obviously, for our GPUs. And so this is going to likely be a very significant business over time. We're off to a great start. And Colette mentioned that it's already at $1 billion run rate and we're really just getting started.

Conclusion:

The I/O Fund portfolio is on fire right now. Our audited results from last year will be out soon, and those results will put us in the 90th percentile of all funds in the world for 2023 and also on a 4-year cumulative basis. From there, the first two months of 2024 have been extraordinary as we positioned for Q1 with a high allocation to many year-to-date winners. However, we do not think it will always remain this way – tech cannot remain in favor forever.

As you know from our pre-earnings writeup, we think Nvidia’s hitting peak growth is “tricky” for investors while acknowledging the valuation is eerily low still — it is very unusual for a stock to be up 250% in a year and yet be cheaper than it was at its bottom (Oct 2022 for Nvidia). The valuation is what makes it a buy on any dips. However, we also won’t be shy about taking gains if we reach predefined price targets. We have one in mind for Nvidia, let’s see if we get there for our next trim.

Too many investors ride high on paper gains, and subsequently lose those gains. We don’t want to choose between holding a high conviction stock and making money. Instead, we want it all – put some money in the bank, lock-in gains, yet hold the stock for the long haul at a high allocation and hedge if tech falls out of favor.

We will keep doing our very best to bring you quality winners alongside risk management with the ultimate goal of answering the million-dollar or billion-dollar question, which is how to safely participate in the life changing gains tech has to offer. We do not believe this question has been satisfactorily answered. Which is why if you see us hit our price target on Nvidia … and trim our high conviction stock … but buy aggressively on dips — then, you’ll know we are working hard to answer this question for our Members.

Recommended Reading:

• Nvidia Earnings Preview: 239% is the Revenue Growth Peak (for now)
• Crypto and AI Opportunity: Real Vision Video Interview
• AMD Q4 2023 Earnings: 75% GPU Raise, Separating the Wheat from the Chaff
• Super Micro Q2 2024 Earnings: The AI Bullet Train

When looking at Nvidia’s forward estimates, what stands out is that revenue growth will peak this quarter at 239%. This can be a tricky place for a tech investor when what’s ahead is slowing growth.

Nvidia could raise and beat, as it’s had a penchant for doing lately, but the slowing growth will eventually catch up to the stock and analysts are pegging H2 for this to happen. To contrast, Nvidia will top over the next two quarters according to revenue growth rates whereas AMD is bottoming.

It’s unclear how much of Nvidia’s expected $100 billion for the data center in FY2025 is priced in. This has been discussed since at least the last quarter’s earnings report, yet the valuation is still very reasonable. We look at this and more below to prepare you for the most anticipated earnings report of the quarter. 

Revenue and Earnings:

Nvidia is expected to report revenue growth of 239.4% for revenue of $20.54 billion for fiscal Q4 ending in January. These estimates have been steadily rising since the H100-related historic quarter last May. Last spring, the January quarter was expected to report 40% growth, and by November, the January quarter estimates were at 195%. I want to paint a picture for why Nvidia’s price action has been so strong – these revised estimates create ample room in the valuation.

For next quarter, estimates are for 204.94% growth for revenue of $21.93 billion.

• Fiscal year 2024 ending in January is expected to report revenue of $59.3 billion for growth of 119.7%.
• For fiscal year 2025, the company is expected to report revenue of $94.1 billion for growth of 58.9% with the growth overweight in the first half of calendar year 2024.

Even if we see a beat and raise, the slowing growth in the second half will be hard to overcome due to high comps. As mentioned in the introduction, Nvidia will begin to lap some stellar quarters come the October CY2024 quarter as the growth in October of CY2023 was 205.5% YoY.

Note: See below for bullish scenarios from analysts where these estimates may be too low.

Earnings growth is similar to revenue growth where the current quarter and also next quarter are expected to be stellar.

• Q4 FY2024 January quarter is expected to report growth of 426.4% for EPS of $4.63
• Q1 FY2025 April quarter is expected to report growth of 354.8% for EPS of $4.96
• From there, the July quarter is also strong at 95.4% growth yet tapers off as the company laps the high comps in the October quarter at 41.4%.

EPS growth of 40%+ is nothing to scoff at, yet the exuberance that pushed Nvidia to achieve a market cap of $1.8 trillion to where it is now the world’s second most valuable company blowing past Meta, Tesla and edging out Amazon, Alphabet is what must sustain. Fundamentals that decelerate are when the exuberance tends to wear off, and that is right around Fall of 2024 as of now.

For EPS the growth decelerates in line with revenue growth:

• FY2024 ending in January is expected to report full year EPS of $12.40 for growth of 271.1%
• FY2025 has estimates of $21.36 EPS for growth of 72.32% — as stated, right now, this is front half weighted
• FY2026 has estimates of $26.54 EPS for growth of 24.24%

We broke our portfolio management rules of having a position above 10% allocation, and therefore, we have to take it seriously that both the top line and bottom line will decelerate from >200% to 40% over the span of six months. Most analysts are in agreement that a beat/raise is likely after hours tomorrow and perhaps for next quarter. What we are keeping an eye on is further out when Nvidia laps the strong quarters in October of this year. That is a long way off, but the market is forward-looking by about 9 months.

According to current estimates, there is no acceleration on the horizon through 2026. We think those estimates will ultimately be wrong especially once AI software ramps, but for now, this is the estimates investors are working with for pricing the stock.

Margins:

• Gross margin of 74.5% expected this quarter compares to GAAP GM of 63.3% in the year ago quarter. This equals $14.9 billion in gross profit. The adjusted gross margin is expected to be 75.5% this quarter.
• Operating margin of 58.7% is expected this quarter for operating profit of $11.7 billion. The adjusted operating margin is expected to be 64.5%.
• Last quarter, net margin was 51% for net profit of $9.25 billion and adjusted net margin was 55.3% for adjusted profit of $10.02 billion.

Cash Flow:

When we compare the world’s most valuable companies, Apple stands out for its cash. This is where Nvidia will have to improve to ultimately surpass Apple. During the hype cycle of AI software is where that is most likely to occur. 

Nvidia’s cash flow is still strong, yet it doesn’t hurt to compare it to other Mag 7 stocks:

Nvidia is the third strongest cash flow generator in the Mag 7, with an operating cash flow margin above 40%, but its smaller scale puts it in sixth place in terms of cash flow generation on a dollar basis. Nvidia’s $17.5 billion in TTM free cash flow pales in comparison to Microsoft’s and Alphabet’s nearly $70 billion – and while it’s not necessarily fair to compare companies in different tech verticals, Nvidia’s rapid ascent to a valuation above Alphabet and Amazon at some point will need to be reflected in the scope of its cash flows, especially when growth begins to decelerate.

Revenue Segments:

• Data center revenue last quarter was $14.5 billion, up 279% YoY. This compares to 31% growth in the year ago quarter. For this upcoming quarter, Nvidia is expected to report data center revenue of $16.9 billion for growth of 367%, which we outlined here along with a few different scenarios including how Nvidia can get to data center revenue of $101 billion in fiscal year 2025. Note that some of the data center revenue is also driven by networking for AI system with InfiniBand up 500% last quarter to $10 billion annualized run rate. We will update you more on networking after Nvidia’s report tomorrow and also when Marvell reports early March.
• Gaming revenue of $2.86 billion is up 81% YoY. This compares to a decline of (-23%) YoY in the year ago quarter.
• Pro Visualization was up 108% YoY for revenue of $416 million compared to a decline of (-65%) YoY in the year ago quarter.
• Automotive revenue of $261 million was up 4% YoY compared to 86% growth in the year ago quarter.

 

Additional Notes:

Analysts are Bullish

Bullish is the common theme heading into the report, given that Nvidia has raced from 13% growth in Q1 to 235% expected growth in Q4, and nothing describes the exuberance that accompanies this historic acceleration better than a handful of analyst estimates.

It’s within the data center that this bullishness is visible, as some analysts are expecting a nearly 20% beat on the Street’s $16.8 billion estimate, up to 60% higher than the Street by end of fiscal 2025.

Loop Capital is Nvidia’s largest bull heading into earnings, attaching a Street-high $1,200 price target on shares as the firm believes data center and overall revenue growth through FY 2026 will be meaningfully above the Street’s estimates. Loop is modeling a 17% beat in data center revenue to $19.6 billion, the highest on the Street, driving a 14% beat in total revenue to $23.1 billion. 

Loop is projecting the data center to reach a $100 billion annual run rate by fiscal Q2 2025, closing the year out with data center revenue of $117.5 billion, 41% higher than the Street’s consensus of $83 billion. Overall, Loop is modeling more than $132.3 billion in total revenue for Nvidia next year, 38% higher than consensus at $95.8 billion and representing 123% YoY growth, 65 percentage points above the Street.

It is entirely plausible that Nvidia’s growth continues to fly past expectations and mirror a scenario similar to what Loop is modeling, given the elevated levels of demand for its H100 combining with the launch of its faster H200 and B100 GPUs later this year.

KeyBanc sees that Nvidia’s AI capacity is well above the Street and can support data center revenues above $100 billion in calendar 2024, nearly 30% higher than what the Street is modeling. In that sense, there still may be room for another surprise in 2024.

UBS follows closely behind Loop with expectations for a similarly large data center beat in Q4 and impressive Q1 guide on strong demand for AI compute. Analysts are expecting Nvidia to beat on data center revenue by ~$2.5 billion to $3 billion, with their estimate at $19.5 billion for the segment and $23 billion for total revenue. UBS also believes that with “supply chain work,” Nvidia could guide to $25 billion to $26 billion in revenue for fiscal Q1, more than 16% above consensus estimates for $21.9 billion. 

BofA is more tame than Loop and UBS, calling for a modest 3-5% beat, or between $500 million to $1 billion above consensus for Q4’s report and Q1’s guide. This view for a beat and raise stems from supply gains offsetting impacts from China restrictions. However, BofA cautions that a beat of this size “’would pale vs. the 10%/22% beat/raise of prior quarters and perhaps disappoint some bulls,’ the more measured pace will also be seen as creating more fertile ground for continued growth.”

Meanwhile, going back to Q3’s report in November, analysts at Barclays said that the Nvidia's large Q3 beat “may not have cleared a very high hurdle,” and "didn't quite meet sky-high expectations" at "only" $2B ahead of consensus with margins at 75% and increasing into January. That commentary serves as a clear, yet somewhat brutal, reminder that even a $2 billion beat and raise had a muted response. 

Market Shifts in Anticipation of Growth Rate Changes

An interesting pattern has been playing out with Nvidia’s stock price over the past few years as its quarterly revenue growth rate has shifted.

Nvidia’s shares topped in November and December 2021, around 7 months before growth decelerated from the 50% range to just 3% growth in the July quarter. Shares bottomed in October 2022, 7 months in advance of revenues inflecting off a (21%) decline in the January quarter to a (13%) decline in the April quarter.

Current estimates are calling for a significant deceleration to just 38% growth in the October quarter, and if this pattern continues, then we are at the brink of setting a top above the $700 range as the market anticipates this deceleration. 

H200 and B100 to Launch in Q2 and Q4

Nvidia has an ambitious AI GPU roadmap, and is expected to release the next-gen H200 and B100 GPUs later this year, just over one year after releasing the H100.

The GPUs are expected to offer another leap in performance for AI training and inference, and the H200 is already in demand by the leading CSPs – AWS will be the first to deploy the new GPU, but Microsoft, Google and Oracle will also be deploying the chips. 

It’s easy to see why the cloud giants are eager to upgrade quickly — Nvidia says the H200 will boast reduced energy usage and thus a lower TCO, while the introduction of HBM3e memory will essentially supercharge the GPU’s performance. For GPT-3 175B, the H200 is expected to offer 1.4x to 1.9x faster LLM inference on the leading GPT and Llama models compared to the H100, and an 18x performance upgrade compared to the A100.

While it will be too soon to gauge what level of demand there is for the two new GPUs from a Q1 guide, a fiscal year guide could provide insight into whether demand for the H200 and B100 can match the H100, or if Nvidia will face initial supply constraints while ramping production of the two at the same time. Additionally, Nvidia will face competition this year from AMD’s MI300s.

A Note on China:

We detailed in our Q3 report the risks surrounding China given its importance to Nvidia as well as the export restrictions impacting Nvidia’s ability to sell the A100 and H100. Nvidia’s CFO said last quarter that “export controls will have a negative effect on our China business, and we do not have good visibility into the magnitude of that impact even over the long term.”

Any China commentary will be critical, given the $80 billion to $100 billion data center segment that may be impacted. Keybanc has the $101 billion estimate for the data center segment this year yet believes that $20 billion is dependent on China. Per our write-up: “Keybanc sees a $5 impact to Nvidia’s $25.62 EPS estimate, and up to a $20B impact to its data center segment with current estimates at $101B for the data center in FY2025.”

Valuation:

Fundamentally, Nvidia’s valuation is still quite cheap compared to historical benchmarks, given the sheer leverage and earnings power that the H100 is driving.

Shares are trading at a 91x PE and 32x forward PE ratio, and though it may look elevated, it’s not a range that Nvidia is unaccustomed to – shares traded between a 75x to 100x PE ratio for a majority of the time from the second half of 2020 to early 2022. However, Nvidia’s forward PE of 32x is where the valuation has room to run. Shares bottomed in October 2022 at a 34x forward PE with declining revenue and EPS, compared to today, where EPS is expected to grow at least 73% YoY to $21.36.

On a PS basis, Nvidia still looks reasonably valued, with more potential upside if it can surprise again in 2024. Shares are trading at a forward PS of just over 18x, around the same level it held through the second half of 2023 and a steep discount to the 32x forward PS it peaked at in late 2021. Prior to 2023, Nvidia last traded at around an 18x forward PS in July and August 2022, despite the challenging macro headwinds and declining revenue growth.

Conclusion:

Our process is such that we have no issues placing Nvidia at a lower allocation if needed, or increasing that allocation back to the #1 position if needed. We want to remain flexible while acknowledging two things – the first, is the company will eventually lap high comps and the sky-high growth will not sustain forever. Secondly, that this company is the defacto leader in the multi-generational investment opportunity of AI and is trading at a reasonable valuation.

It’s entirely plausible we get a beat/raise tomorrow and a beat/raise for the next quarter. What needs to be watched is the H2 estimates as they lap high comps of 200%+. The first graph above best illustrates this.

With that said, we are in the first, early powerful move for AIfirst, early powerful move for AI. We have two more powerful moves to go — AI software and AI at the edge, and then automotive will be the grand finale. Nvidia is a leader in both, and I’ve been quite clear that our stance is that AI software for Nvidia specifically will drive more revenue than AI accelerators. We are seeing early indication that Nvidia can and will compete with Big Tech on AI software and AI at the edge with the Chat with RTX application.

Stay tuned for our post-ER writeup to hit your inboxes tomorrow night.

Premium Members, you can look forward to a deep dive on a stock that is new to the IOF portfolio that we plan to accumulate this year – we called Meta the one that got away in our year end webinar. This stock is the runner-up and we think it has more room to go (fingers crossed). Look for this in your inboxes next week.

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• Crypto and AI Opportunity: Real Vision Video Interview
• Cloudflare Q4: Key Metrics Accelerate
• Special Webinar Replay – February 1, 2024
• AMD Q4 2023 Earnings: 75% GPU Raise, Separating the Wheat from the Chaff

Memory plays a critical role in the world of AI, as faster and more powerful AI chips and servers will require increasing amounts of memory. The recent surge in generative AI and AI GPUs, spurred by the success of OpenAI’s ChatGPT and development of hundreds of other large language models, are forecast to bring about a new DRAM market, underpinned by high-bandwidth memory (HBM) and DDR5. Micron is uniquely positioned to benefit from this secular AI growth tailwind, leading the industry with the fastest, highest-capacity HBM, alongside other industry-leading products for AI applications.

This analysis will touch on how the memory market is recovering off one of the worst cyclical downturns it has faced recently, how NAND and DRAM are evolving, the massive shift ahead for HBM3, and how this translates to a multifaceted growth opportunity for Micron to tap into to push towards record revenues.

Please note, our plan is to patiently wait for the right entry. This is detailed below at the Conclusion.

Memory Market Recovery Begins in 2024, Accelerates in 2025

The memory market is coming off its worst cyclical downturn in 15 years, with late 2022 seeing memory revenues fall off a cliff, with challenges persisting through much of 2023. Heading into Q4, the market is showing multiple signs of bottoming – South Korean NAND flash exports returned to growth in September, NAND and DRAM pricing is expected to return to growth this quarter, and supply bit shipments are forecast to return to double-digit growth in 2024.

The downcycle starting in Q2/Q3 of 2022 exceeded the previous cycle in late 2018 in terms of its scale and duration – memory revenues declined approximately (-26%) from ~$44 billion in Q2 to nearly $33 billion in Q3. NAND revenues declined (-24.3%) to $13.7 billion, while DRAM fared slightly worse, with revenues declining (-28.9%) to $18.2 billion.

Q4 of last year saw another ~ (-27%) sequential decline to just over $24 billion in revenues. NAND revenues slipped around (-19.7%) sequentially to ~$11 billion, while DRAM revenues fell (-34.2%) sequentially to $12.3 billion. Essentially, DRAM revenues saw nearly a (-50%) decline in just two quarters, while the broader memory market declined just over (-45%).

Driving this rapid slowdown was a rapid deterioration in NAND and DRAM pricing – this was exacerbated by excess inventory at major manufacturers Samsung and SK Hynix leading to a fire sale at extremely low prices. NAND and DRAM both saw pricing decline more than (-20%) QoQ in Q3, and nearly (-30%) QoQ in Q4 2022. The previous year, from Q3 2021 through Q1 2023, NAND prices fell (-55%), and DRAM declined (-57%).

Source: Yole Intelligence

Pricing is expected to bottom out in Q3, with Q4 projected to see the first QoQ increase in both NAND and DRAM pricing since Q3 2021. That trend is set to continue through 2024, with Yole Intelligence forecasting NAND and DRAM prices to continue rising.

Source: Bloomberg

South Korean export data further supports the recovery story for NAND and DRAM.

NAND flash exports for September rose for the first time in a year, while DRAM exports registered the smallest decline. NAND flash exports increased +5.6% for the month, compared to an (-8.9%) decline in August, while DRAM exports fell (-24.6%). In October, chip exports from the country declined just (-3.1%) YoY to $8.9 billion in October, the smallest decline since August 2022, and another data point in support of memory’s recovery from the deep trough of late 2022 and early 2023.

A Broader Look at Memory’s Rebound

Pricing and export data both are signaling a return to growth for the memory market starting in Q4 and persisting through 2024 and 2025. Production cuts beginning in early 2023 are expected to lead to an undersupply of chips over the next four to eight quarters, and combined with steadily increasing NAND and DRAM prices, the memory market is projected to jump to record levels by 2025. cuts beginning in early 2023 are expected to lead to an undersupply of chips over the next four to eight quarters, and combined with steadily increasing NAND and DRAM prices, the memory market is projected to jump to record levels by 2025.

Overall, the memory market is projected to register a (-41%) YoY decline to approximately $84 billion in revenues in 2023, down from ~$144 billion in 2022. DRAM revenues are projected to fall (-47%) YoY from $79.7 billion in 2022 to ~$42 billion in 2023; NAND revenues are expected to fall (-37%) YoY from $58.7 billion to $37 billion this year.

2024 is forecast to see a sharp rebound in the market, with revenues rising approximately +55% YoY to more than $130 billion, according to Yole Intelligence. The increase in prices are driving the revenue jump with DRAM growing by “as much as 87 percent” in 2024 while NAND flash memory is projected to “bounce back to grow by about 60 percent,” according to Gartner.

2025 is projected to see the market reach record revenues of above $200 billion, or over +55% YoY for a second year straight, boosted by increased prices, undersupply – especially in DDR5 and other DRAM sub-segments — and AI mega-trends.

According to Lam Research, AI servers use 8X DRAM and 3X NAND compared to an enterprise class server.  For DRAM, that AI server and data center demand is expected to push the markets to new highs, from that ~$42B size in 2023 to ~$96B in 2028, according to Yole Intelligence.

Overview: HBM and DDR5’s Role in AI

High-bandwidth memory (HBM) – more specifically the next-gen HBM3/HBM3e – and DDR5 play a mission-critical role in AI, and such a role will lead the market to stunning growth: market leader SK Hynix projects the HBM market will grow at an 82% CAGR through 2027.

High bandwidth memory (HBM) offers higher bandwidth, capacity, performance, and lower power by vertically stacking up to twelve DRAM memory chips to shorten how far data has to travel, while also allowing for smaller form factors. Stacked memory chips are connected through something called “through silicon vias” or TSVs. HBM is increasingly being used to power machine learning, high performance data centers, and more recently, generative AI models. For a different perspective into HBM from an equipment leader, read our analysis on Lam Research here.here.

DDR5 DRAM, or double data rate 5, aimed to double bandwidth and data transfer speeds at a lower latency and power consumption than its predecessor, DDR4. DDR5 memory chips can be mounted on circuit boards to create memory modules, for use in servers or PCs. DDR5’s increased bandwidth allows for faster processing for memory-intensive applications, such as generative AI and training LLMs.

Demand for high-capacity memory is being driven by the sudden rise in generative AI and LLMs, which both require significant amounts of computing power and substantial amounts of DRAM to meet elevated performance requirements. SK Hynix’s head of DRAM marketing Park Myung-soo explained that “an AI server requires 500-gigabyte (GB) or larger High Bandwidth Memory (HBM) chips and at least 2-terabyte (TB) DDR5 chips.” As such, HBM3 and DDR5 are projected to see a rapid shift to become the dominant architectures over the next few years.

In 2022, HBM2e was the dominant HBM architecture, accounting for ~70% share of HBM shipments, with the emerging HBM3 taking just 8%. However, HBM3 will see a surge in demand in 2023 and 2024, rising to 39% share this year and approaching 60% share in 2024 to become the dominant architecture. This will be driven by the massive demand for Nvidia’s H100 GPU and AMD’s upcoming MI300, which are underpinned by HBM3.

As a result, HBM3 revenues are forecast to rise as much as +127% YoY to $8.9 billion, according to TrendForce, while SK Hynix estimated that this AI chip boom will lead to the HBM3 market expanding at an +82% CAGR through 2027.

Similar to HBM3, DDR5 is expected to quickly become the mainstream DDR architecture, driven by demand for faster compute for AI. DDR5 was expected to take more than 25% share of bit shipments in 2022, before rising to take more than 55% share in 2023. By 2026, DDR5 is projected to hold almost 95% share of bit shipments as the memory market completes its transition over to DDR5 from DDR4.

Source: Tom’s Hardware

Micron is well positioned to benefit from this massive shift to HBM3 and DDR5, as it is first-to-market with its 128GB capacity DDR5 RDIMMs (registered memory modules) and its eight-high 24GB HBM3e cube.

Background on Micron’s Positioning in HBM3 and DDR5

Throughout 2024, Micron is seeing “accelerating AI-driven opportunities for memory and storage across multiple market segments from the data center to the edge,” and it is rolling out industry-leading HBM and DDR5 products. Micron’s 8-high 24GB HBM3e cube began sampling in late July 2023, and it plans to sample its 12-high 36GB HBM3e cube in the first quarter of 2024 – among the first in the industry to reach the market.

Micron is investing heavily to capitalize on this HBM3/3e shift, with management noting last quarter that “assembly and test capex is projected to double year over year in fiscal 2024, predominantly driven by investments to support HBM3e production.”

Micron currently has deployed the industry’s fastest and highest capacity HBM3e on the market, supporting the most advanced AI training and inference. Micron’s HBM3e can deliver faster training times and more responsive queries for LLMs — it “increases performance per watt resulting in lower time to train LLMs such as GPT-4 and beyond.”

Micron’s HBM3e provides higher memory bandwidth that exceeds 1.2TB/s and 50% more memory capacity per 8-high 24GB cube, improving the accuracy and precision while training LLMs. Micron explains that this allows for up to 50% or more queries per day while reducing training times by 30%, thus lowering total cost of ownership (TCO).

TCO is an important factor for hyperscalers when evaluating equipment, especially GPUs, as it factors in not only the acquisition cost but also the costs associated with owning and operating the equipment over the hardware life cycle. Micron’s 24GB cube touts 2.5 times performance per watt improvement over previous generations; this increased power efficiency generates “tangible cost savings” for AI data centers. Micron explains that for “an installation of 10 million GPUs, every five watts of power savings per HBM cube is estimated to save operational expenses of up to $550 million over five years.”

In terms of DDR5, Micron says it currently sits as the market leader, with the most market share in the early innings of this DDR5 shift, underpinned by the memory industry’s most developed DDR5 ecosystem. Micron has launched its high-capacity 96GB DIMMs, and at the beginning of November, Micron launched the first-to-market 128GB DIMM based on its 1β technology, which it says “delivers the fastest speed and lowest latency” of any DDR5 DIMM available.

Micron explains that the 128GB DIMM offers more than 24% improved energy efficiency, as well as 16% improved latency, which is crucial for “memory-bound workloads such as generative AI, in-memory

databases, and real-time data analytics, where high-capacity is needed, and prompt response times are critical for real-time inference.” Micron adds that the 128GB DIMM “delivers up to 28% faster performance for AI training” on models such as Meta’s Llama 2-70B.

Customers are seeming optimistic about the benefits that the 128GB DIMM offers – AMD SVP Dan McNamara said that “as AMD advances compute with our next-gen EPYC processors, Micron’s 128GB RDIMMs will likely become one of the main memory options to deliver high-capacity and bandwidth per core capabilities to address the demands of memory-intensive applications.” Intel VP Dr. Dimitrios Ziakas echoed that sentiment, saying, “Intel is evaluating this 32Gb memory offering for key DDR5 server platforms based on the resulting total cost of ownership benefits to cloud, AI and enterprise customers.”

Competition Remains Stiff for Micron

While Micron claims it is first-to-market with HBM3e and holds the most market share in DDR5, competition remains stiff, as Micron is competing against two heavyweights who control more than 85% of the market – Samsung and SK Hynix. The two South Korean firms are rapidly advancing HBM3 development, with SK Hynix already firmly established in the market as it was the preferred HBM3 supplier for Nvidia’s highly popular H100 GPU.

SK Hynix unveiled its 1TB bandwidth HBM3e memory in late Q2 this year, with mass production set to start in early 2024. SK Hynix is also reportedly eyeing development of its next-gen HBM4 cube with a plan to introduce that product to market in 2026.

Samsung is currently mass producing its 12-high 24GB HBM3 cube, ‘Icebolt’, and is sampling its HBM3e cube ‘Shinebolt’ to prospective customers. While coming to market later than Micron and SK Hynix, Shinebolt is rumored to compete with Micron on performance, with both offering 1.2 TB/s bandwidth. Samsung is also expected to unveil its fifth-gen HBM3e cube, named ‘Snowbolt’, by the end of the year, followed by a sixth-gen HBM cube next year.

Nvidia, AMD Battling on Memory

HBM3 and HBM3e are becoming the next battleground for memory chip manufacturers as well as AI chip developers, especially Nvidia and AMD, who are pushing the boundaries with the amount of memory bandwidth in each GPU.

AMD’s competing GPUs, the MI300 series, substantially boosted memory and bandwidth relative to the H100, utilizing Samsung’s HBM3. The MI300A is shipping with 128GB HBM3 memory while the MI300x ships with 192GB memory and 5.2 TB/s of bandwidth – that’s 1.6x more bandwidth and 2.4x more HBM3 density than Nvidia’s H100.

Nvidia is rapidly moving forward with its GPU roadmap, as it aims to launch its next-gen H200 and B100 GPUs next year followed by the X100 GPU in 2025 – each GPU will accelerate AI inference times along an exponential curve, thus creating a need for more memory and more bandwidth.

Source: Nvidia

Nvidia’s A100 shipped in two different versions with either  40GB or 80GB HBM2e memory, with the 40GB offering 1.55TB/s of bandwidth and the 80GB offering 2TB/s bandwidth, the industry’s fastest at the time in 2021.

Nvidia then upgraded from HBM2e to HBM3 DRAM, tapping SK Hynix as the supplier for its H100 GPU for 1.6X the bandwidth. Nvidia’s upcoming H200 GPU, set to launch in early 2024 as the industry’s first HBM3e-powered GPU, is expected to ship with another 1.5x bandwidth boost relative to the H100 with nearly 1.8x the memory.

It is rumored by some sources that the H200 is shipping with Micron’s HBM3e, instead of SK Hynix. rumored by some sources that the H200 is shipping with Micron’s HBM3e, instead of SK Hynix. Micron reportedly sampled its 24GB HBM3e memory with Nvidia at the end of July, with SK Hynix following in mid-August and Samsung in early October. According to sources in South Korea, Nvidia remains engaged with SK Hynix for the H200.

This raises an important point about competition in this AI chip and memory race: if Nvidia is switching this quickly from one supplier to the next based on time to market, this raises the risk that Samsung or SK Hynix could be first to market with a superior HBM4 product and take share away from Micron, especially if they undercut Micron on price.

AI Will Increase Secular Growth Opportunity for Micron

The recent surge in AI and data center growth fueled by Nvidia is expected to translate into an interesting shift in revenue mix for Micron: it foresees exposure to the more cyclical and seasonal PC and mobile end market declining from 55% share of revenue in FY21 to 38% share in FY25.

Data center and graphics are forecast to rise from 30% share of revenue in FY21 to 42% share by FY25, with AI and machine learning driving such growth; the projected surge in the HBM3/HBM3e market supports this shift. In data center, Micron is expecting NAND GB shipped per server to increase 3x and DRAM 2x by 2025, as AI servers require significantly more memory than traditional servers.

Automotive and industrial are projected to rise from 15% share to 20% share, as both end markets exhibit much faster growth rates than PC and mobile due to the rise of electric vehicles, industrial robotics, and other emerging trends which require a higher semiconductor content per unit.

This revenue mix shift is underpinned by long-term agreements, at ~75% of revenue in CY22. This offers multiple benefits: more visibility into forward revenues, less exposure to cyclical pricing trends in NAND/DRAM with pricing locked in for the contract duration, reduced impacts from supply and demand imbalances, and ultimately more stable margins.

Financials Sharply Improving

The swift decline in the broader memory market over the past eight quarters has had a significant effect on Micron’s financials. Revenues plummeted, falling (-49.5%) YoY in FY23 from $30.76 billion to $15.54 billion. Operating margin also shifted deep into the red, with Micron posting a (-37.0%) operating margin, compared to a 31.5% operating margin in FY22. Micron reported a net loss of (-$5.83 billion), or ($5.53) per share, compared to net income of $8.69 billion, or $7.75 per share, in FY22. This was the sharpest decline for revenues, operating income, and net income in Micron’s history.

Fiscal Q4 (ending Aug 31) showed initial signs of a recovery:

• NAND revenues increased 19% sequentially to $1.2 billion, bit shipments rose >40%
• DRAM revenues increased 3% sequentially to $2.8 billion
• Total revenue increased 7% sequentially to $4.01 billion
• GAAP net loss improved 25% sequentially to ($1.43 billion)
• Operating cash flow improved 938% sequentially to $249 million, but is much lower compared to $3.78 billion in the year ago quarter

Fiscal Q1’s guide was boosted at the end of November:

• Revenue is projected to be $4.7 billion, compared to a prior view for $4.4 billion +/- $200 million. This would represent YoY growth of 14.9%.
• Gross margin is expected to be (0.5%) to 0%, compared to the prior view of (4.0%) +/- 2.0%

The surge in the HBM3 market, positive outlooks for a NAND and DRAM pricing recovery through 2024 and into 2025, and a surge in AI and data center demand are expected to fuel a rapid recovery for Micron’s top and bottom line.

Moving forward through FY24 (Sept. 2023-24, this reacceleration in NAND and DRAM, buoyed by increasing pricing, is expected to send Micron’s revenue on an eight-quarter streak with more than +20% growth – even as high as +65% as it laps easy comps. On a dollar basis, revenues are forecast to rise from $4.01 billion in Q4 of fiscal 2023 to $8.71 billion in Q1 FY26.

Essentially, Micron is on track to potentially reach record revenues just over eight quarters after that massive slump. However, EPS is forecast to be below levels seen in FY18 and FY22 – estimates peak at $2.05 in Q4 FY25, compared to $3.53 in Q4 FY18 and $2.59 in Q3 FY22. What this means is that revenues are being propelled higher by this shift to HBM3/3e (as it exhibits much higher ASPs relative to typical DRAM memory), but margins are having a tougher time recovering as rapidly due to the deep trough that NAND and DRAM prices must rebound from.

Operating cash flow is also expected to rebound quickly after plunging alongside revenues and EPS in FY23. OCF margin is estimated to rebound from 10% to more than 40% by FY25, with Micron projected to generate upwards of $13.2 billion in operating cash flow, compared to $1.56 billion in FY23.

Micron has applied for CHIPS Act funding for its New York and Idaho fabs, saying that federal funding and tax incentives were needed to develop both facilities. Micron is investing up to $115 billion over the next 20 years to build out its US production base, in an effort to boost the US’ share of production from 2% to 15% and diversify away from East Asia – Micron’s current high-end chip production is more concentrated in Japan and Taiwan. Given that construction isn’t set to begin until late next year with production commencing as early as 2026, any margin benefits from the CHIPS Act are unlikely to be recognized over the short and medium term.

Risks

China presents a real risk to Micron as it does to much of the semiconductor industry. Micron is generating nearly one-quarter of its revenues from China, and CEO Sanjay Mehrotra recently told CNBC that “about half that revenue is at risk.” Micron was the first American chip company targeted by China with a partial ban earlier this year, and the company is working to improve relations with the nation, though there is no guarantee that such a ban will be lifted.

However, there are risks to this recovery, in that it may not unfold as smoothly as projections picture. Quarterly revenues have been variable over the past few fiscal years, with multiple sequential declines present along the growth trend, so there is a risk that current projections calling for sequential growth through Q1 FY26 do not account for some of that lumpiness.

In addition, there is also a tail-end risk in that NAND and DRAM pricing does not exhibit consecutive sequential growth through 2024. This could be exaggerated if NAND pricing slips back to sequential declines in Q2, as it is forecast to see just +3-4% sequential growth in that quarter. Pricing has shown to be volatile in the past, and there is no guarantee that pricing will rebound smoothly and steadily. Should some sequential declines appear in NAND and DRAM pricing in 2024, this would likely weigh on both margins and EPS.

Valuation

Micron’s fundamental backdrop is projected to see rapid top-line growth and a sharp bottom-line improvement on the backs of surging HBM3/3e demand; however, semis have rallied this year due to Nvidia leading the historic Nasdaq rally in the first six months of 2023. This has resulted in a rising of all boats, as many semis are trading far above historical multiples. The product of strong gains in the broader semiconductor industry has pulled Micron’s shares higher: the iShares Semiconductor ETF has gained +48.7% YTD, significantly outperforming the S&P 500’s +18.7% return.

Micron currently trades at a 5.43x PS ratio, its highest level in more than 20 years, in part due to FY23’s (49.5%) YoY decline in revenues while shares have gained +54.5% YTD. Even with +34.5% estimated revenue growth in FY24 to $20.9 billion, Micron still trades at a 4.05x 1-year forward PS ratio, far above its 5-year median PS ratio of 2.75x.

Micron’s forward EV/EBITDA multiple of ~13.0x also is elevated, at nearly double its 5-year median multiple. This accounts for the expected top and bottom line recovery for next year, but it will take more than a few quarters for this top-line growth to translate to a strong recovery in EBITDA and regression to the mean.

Conclusion

As Beth stated in Nvidia’s Q3 earnings preview, HBM3e is rapidly making its presence known, with Nvidia’s upcoming H200 GPU to be the first with HBM3e memory, rumored to come from Micron (still needs confirmation, but is an exciting possibility should it come to fruition).

Nvidia’s rapid GPU upgrade roadmap in response to AMD’s MI300X is a testament to the fast-moving nature of not just the AI GPU market, but also memory – HBM3e is coming to market in 2024, but may quickly be replaced by HBM4 in 2025 and future iterations of HBM memory beyond 2025 to 2026. 

It is a highly concentrated market, dominated by Samsung and SK Hynix, though Micron remains an important player as it moves ahead with industry-leading first-to-market HBM3e and DDR5 solutions. Micron looks well positioned to capitalize on this AI mega-trend, with revenues from both solutions contributing in 2024. On a broader scale, AI and data center are set to transform Micron’s revenue mix to stronger and more secular end markets from its historically cyclical and seasonal concentration in PCs and smartphones — Micron estimates data center and AI to rise from 30% of revenue in FY21 to 42% in FY25, while smartphone and PC’s 55% share is estimated to decrease to just 38%.

However, Micron is valued at elevated multiples, when memory stocks typically would be on a deep discount given the steep downcycle, yet SOXX returns are > QQQ returns. This has lifted the tide of all boats, and memory stocks such as Micron are not trading where they’d normally trade, which makes a near-term buy less likely for the I/O Fund until we see a pullback. This is where the I/O Fund is unique, not only do we strive to be early in our research, such as to the importance of memory for the next generation of AI accelerators, but we are also careful with our timing.

Technical Analysis

The long-term pattern best fits as a large degree diagonal pattern. This is a 5 wave uptrend that is characterized with large corrective swings. If accurate, we are in the middle of the 4th wave correction, which would target the $48 – $35 region before completing.

If we zoom into the 2021 top to now, we can get a better look at the risk parameters that would either confirm or invalidate this setup. For one, the price action from the 2021 high best fits this pattern. Note how we only have a clear 3 wave drop into the October, 2022, low. This is followed by a messy and overlapping uptrend into the recent high. More times than not, when the following bounce after a 3 wave drop is a messy and overlapping move, it signals a bounce in a larger corrective pattern.

If we see a break down below the $62-$58 support region, then this pattern will be confirmed, as we establish lower targets to buy this stock. On the other hand, in order to invalidate the risk present in the current price structure, we need to see price break above the $84-$91 resistance zone. The higher we go into this region, the more likely that we will see a continuation of the larger uptrend.

I/O Fund Equity Analyst, Damien Robbins, contributed to this analysis. I/O Fund Portfolio Manager, Knox Ridley, contributed to this analysis.

Recommended Reading:

• Memory and PC Stocks Review
• Marvell Q3 Earnings: The Market Wants More on AI
• Marvell Q3: AI-Driven Rebound on the Books, Bottom Line in Focus
• Nvidia Fiscal Q3 Earnings: The China Impact
• 2024 Trend: Memory and PC Rebound