AMD provided a solid report yet the market is struggling to find room in its valuation. Similar to Microsoft, the only time that AMD has traded this high on sales was in 2020 and again at the top 2021.

By my estimation, the selloff has nothing to do with AMD’s AI potential, or even the sequential decline in the other segments, rather it’s about timing and tech being stretched overall. We covered this in great detail in the Q1 webinar.

It’s true that AMD is trailing a GPU giant, and any guide will pale in comparison to Nvidia’s glorious 2023 performance. Yet it’s also true that AMD is coming out swinging with $3.5B in GPU revenue in the first quarter the GPUs are shipping. In a previous note, I stated: “Technically speaking, this report [Q3] was stronger than Nvidia’s was this time last year despite the GPUs shipping at the same time seasonally – NVDA had 1% QoQ growth for data center revenue in the October quarter and then declined (-6%) QoQ in the Q4 January quarter. To jog your memory, it was the guide provided in May (for the July quarter) when Nvidia had its blowout quarter.” To compare, data center growth for AMD is 38% YoY and 43% QoQ. However, Nvidia enjoyed the luxury of taking the market by surprise, and so expectations were low.

The $2 billion guide for FY2024 GPU revenue from last quarter was raised to $3.5B “plus” this quarter. Part of the issue is that analysts, independently, are creating very high expectations. The whisper number going into the report was $3 billion to $3.5 billion with some pushing for a $6 billion guide. The reason investors should separate the wheat from the chaff is that raising GPU sales by 75% in one quarter is actually very impressive (and more than enough for one quarter for our purposes). As a reminder, this is the first quarter the MI300s are shipping. 

AMD will have to face outsized expectations as the company ramps, yet the 75% raise is a great start. We dissect the rest of the report for you below.

Financials:

Revenue and EPS:

• Revenue of $6.28 billion was in line with management guidance of $6.1B +/- $300M. Analyst consensus was $6.14B.
• The guidance for Q1 missed with $5.4B guided versus $5.78B consensus.
• Adjusted EPS of $0.77 came in as expected with $0.69 adjusted EPS expected next quarter. GAAP EPS was $0.41.

Margins:

The adjusted gross margin guide expanded by one point and this is expected to continue to expand as data center increases in the product mix.

• Gross margin of 47% was in line with last quarter
• Adjusted gross margin of 51% and adjusted gross profits of $3.14 billion was in line with management guidance. The company guided for adjusted gross margin of 52% next quarter.
• Operating margin of 6% expanded by two points and has been steadily increasing over the past few quarters.
• Adjusted operating margin of 23% was in line with management guidance for adjusted operating profit of $1.41 billion.
• GAAP net margin of 10.7% is a nice beginning to the bottom-line recovery for AMD, up from 5% in the previous quarter and up from 0% in the year ago quarter. Adjusted net margin was 18.6% for adjusted net income of $1.25 billion.

Regarding margins, it was indicated that the second half of the year would show improvement. Per the CEO: “I would say the headwinds side [of gross margin] 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. That is a headwind for us. Because it does have a very nice gross margin. But overall, we feel pretty good about the trajectory of the gross margin improvement, especially second half.”

Cash:

AMD reported operating cash flow of $381 million for a margin of 6.1%. This is lower than the previous quarter at 7% and the year ago quarter at 10%. This was due to “paying $550 million in cash taxes, primarily due to previously deferred taxes from California disaster relief efforts made available by the IRS.”

Free cash flow of $242 million for a margin of 4% was 1 point lower than the previous quarter and 4 points lower than the year ago quarter.

Product Mix:

Data Center:

The data center revenue was $2.3 billion, up 38% YoY and up 43% QoQ. The full year data center revenue was $6.5 billion, up 7% YoY. Next quarter, data center revenue is expected to be flat with “a seasonal decline in server sales offset by a strong Data Center GPU ramp.”

As stated, GPUs are expected to grow sequentially and exceed $3.5 billion in FY2024. In Q4, GPUs were $400 million of the $2.3B in data center revenue. There was an overabundance of questions about the GPU number which I’ve detailed for you below. However, here is one comment the CEO said: “And so, we worked closely with our supply chain partners to ensure that we can ship more than $3.5 billion, substantially more depending on what customer demand is as we go into the second half of the year.”

The CFO stated: “Yeah, Harsh. Let me answer your question about the MI300. Exiting Q4 2024, is it possible to get to $1.5 billion? It is possible, right, because Lisa mentioned earlier, we'll see sequential increase in each quarter and more back-end loaded in second-half and we do have a supplies more than $3.5 billion. And of course we will continue to make progress with our customers. So the math, yeah, it's possible, but right now we are really looking at focus on the execution of the current $3.5 billion plus.”

Client Segment:

The Client segment reported Q4 revenue of $1.5 billion, up 62% year-over-year yet was flat sequentially. This is lower than my notes anticipated as the guide last quarter for Client was “sequentially, Client revenue to increase.”

The CFO stated “Client is very similar to server, typically Q1 is high-single-digit to low-double-digit. That's consistent with past.”

Data center GPUs dominated the Q&A whereas this segment is incredibly important to AMD’s near-term price action (near-term is defined as this year, particularly in the second half). I’m not concerned about “if” it’ll happen rather “when” the AI PC market will become a large contributor to AMD’s revenue. Will it be this year or next? If I had attended the call, I would have asked more about this as a 75% increase in GPU revenue is plenty for one quarter when they’ve only begun to ship these units, whereas more clarity on this segment can help time AMD’s next leg up.

Moving forward, for next quarter, Client is expected to decline sequentially. This is normal for Q4 to Q1 due to seasonality. The CFO stated the following about 2024: “Directionally, for the year, we expect 2024 Data Center and the Client segment revenue to increase driven by the strengths of our product portfolio and the share gain opportunities.”

We dug up the following analyst note regarding the Client segment potentially rebounding in H2 2024: (01/23) Although PC shipments were reduced during the fourth-quarter, "we expect standard server requirements will normalize in the coming quarters, creating upside to server demand beyond the mid-single-digit growth anticipated by industry analysts," Wedbush analyst Matt Bryson wrote in a note. The anticipated recovery is in part due to the "replacement cycle" of PC's purchased during the pandemic, which is expected to occur during the second half of this year, Bryson said. "We are lifting our estimates for 2024 and 2025 given more confidence in our expectation standard server builds lift, and our belief that PC sales dip less seasonally and recover more in the second half of the year," Bryson wrote.

Gaming:

Gaming is weighing on AMD’s numbers as this segment has not bottomed yet. The segment reported $1.4 billion in revenue and was down (-17%) YoY and down (-9%) QoQ.

The guide on gaming was a lowlight: “Gaming segment sales are expected to decline sequentially, with semi-custom revenue expected to decline by a significant double-digit percentage.” This means Q4 is certainly not the bottom on gaming either. The CFO stated the same about FY2024 Gaming revenue which is that “Directionally, for the year […] Gaming segment revenue to decline by significant double-digit percentage.”

It was also stated by the CFO that gaming will decline by more than 30% in Q1: “On the Gaming side, Lisa mentioned during his — her prepared remarks is we have the latest stage of product cycle in the year five of gaming console. But at the same time, we also have inventory at the customers. So, the combination of those impact, we expect the Q1 Gaming sequential declines probably more than 30%, so hopefully that help you a little bit.”

Embedded:

Embedded reported $1.1 billion in revenue, which is a decline of (-24%) YoY and (-15%) QoQ. This is due to increased inventory. The CFO stated the following about 2024 Embedded revenue: “Directionally, for the year […] Embedded segment revenue to decline” yet later stated: “And at the same time Embedded is going through the bottoming process. We do think the second-half we will see the recovery.”

Management did highlight that Embedded drove a 25% increase in design wins to $10 billion. This will come in handy for the automotive push we want to see our portfolio participate in 2026-2028, which I also discussed on the webinar.

Earnings Call:

MI300 GPU Questions Were Plentiful:

Most of the questions on the call were fruitless attempts to get AMD to raise the 2024 GPU guide. Instead, management stuck to the $3.5 billion plus comments. Overall, it’s quite clear that $3.5 billion will become a distant memory as we move through the year but management isn’t willing to give away too much, too soon.

Joseph Moore

Great. And for my follow-up, I guess a lot of the forecasting of your business that I'm hearing is coming from supply chain and we're sort of hearing AMD is building X in Asia. I guess, how would you ask us to think about that? Are you looking at being kind of sold-out for the year and so the supply chain would be close to revenue? Are you building for the best-case scenario? Just I worry about sometimes expectations when people hear the supply chain numbers. And I'm just curious how you bridge the gap.

Lisa Su

Yeah. So, I mean, Joe, I think we updated our revenue expectations this quarter from our original number of $2 billion to $3.5 billion to try to give some bounding on some of the discussion out there. The way to think about the $3.5 billion is these are customers that we're working with, who have given us firm commitments on what they need. As you know, the lead times on these products are quite long. So, it's important to have those forecasts in early and we have a strong order book. So, that gives us good confidence to exceed the $3.5 billion. From a supply chain standpoint, our goal is always to build more supply we — and so, from that standpoint, we have also worked with our supply chain partners and secured significant capacity. Think about it as first half capacity is tight and more comes on in the second half of the year, but we've certainly made more progress there. So, we do have more supply, and we're going to continue to work with our customers on their deployments and we'll update that number as we go through the year.”

Here was another good discussion on the MI300 and the trajectory investors can expect in 2024:

Toshiya Hari

Hi. Thank you for taking the question. I had one on the MI300 as well, Lisa. I guess, first of all, how should we think about the quarterly trajectory beyond Q1? You talked about Q1 being up sequentially. Is it fair to assume kind of a straight line as we progress through the balance of the year? Or is it more second half skewed? How should we think about that? And I guess more importantly, some of the cloud potential customers that have yet to officially sign-up for or sign-off on the MI300. I guess what's the sticking point? Is it just a function of time and you just need a little bit more time to go back-and-forth and tweak things or is there a software kind of concern? I guess what's holding them back at this point?

Lisa Su

Yeah, Toshiya, thanks for the question. So, first on the MI300 trajectory. I think you would expect that revenue should increase every quarter from now through sort of the end of the year, but it will be a bit more second half weighted and part of that is just customers as they're finishing up their qualifications in their lines as well as sort of how our supply chain is ramping. So, yes, it should increase each quarter, but be a bit more second half weighted. And then, to your comment about customers, look, we are engaged with all of sort of the large customers. These are all folks that know what's really well, given our deep relationships in EPYC. I think people just have different adoption cycles as they consider what they're trying to do in their roadmap. But I view this as still very, very early innings for us in this space. And I think the question was asked earlier. I think the key is this is not just about MI300 conversation. But it really is about sort of our long-term multi-generational roadmap. And so, that's the context on which we're working with our largest customers, as well as, as you know, there's a lot of demand coming from folks that are more AI centric and not necessarily typical cloud customers, but more enterprise or let's call it AI-specific companies that we're also very well engaged with.”

More on Embedded and Gaming:

The CFO provided the following color on embedded and gaming:

Jean Hu

Yeah, Aaron, I'll give you some color about Client seasonality and others. So, Client is very similar to server, typically Q1 is high-single-digit to low-double-digit. That's consistent with past. On the Embedded side, it's very consistent with what we said in the past and the consistent with what you see in the industry's Embedded business is going through a bottoming process, and we think Q1, it will have a low-double-digit sequential decline. That's Embedded. On the Gaming side, Lisa mentioned during his — her prepared remarks is we have the latest stage of product cycle in the year five of gaming console. But at the same time, we also have inventory at the customers. So, the combination of those impact, we expect the Q1 Gaming sequential declines probably more than 30%, so hopefully that help you a little bit.

Conclusion:

AMD has been kind to investors over the past year with 200% gains since Jan 1, 2023 – and the kicker is that AI revenue was officially realized in Q4 for the first time, at a mere $400 million. The market is correct to anticipate that AMD will be a major player in AI. How long until AMD becomes officially number two? Right now, Broadcom is expected to report $7 billion in AI revenue for 2024. I think AMD will surpass Broadcom very quickly.

From there, it will be a battle – a fun one for us to observe as we own both NVDA and AMD. Readers on our site know that I call AMD the “Dark Horse” because it’s frequently underestimated. The stock sold off in July when AMD held their AI event to officially announce the MI300s. Today, the stock is selling off in the quarter the company is shipping them. Clearly, the market sees potential, hence the stock performance. Yet, AMD investors should be prepared for periods of doubt, similar to when AMD emerged as a leading CPU design company. We are looking to be entering one of those periods now.

With that said, tech has a way of becoming stretched, especially following a historic year for the Nasdaq (btw, 2023 was the leading year for gains in over 20 years since dot-com era, edging out 2009), and thus we have not been buyers of AMD as of late. In the near-term, following our technical analysis and broad market plan is going to be as equally important as following our stock analysis.

On that note, this Thursday, Pro Members are invited to attend a special 1-hour webinar with Knox Ridley as he goes through what investors can expect for tech stocks in Q1 and the risks present in the market. We encourage our Members to attend the webinar or watch the replay as the I/O Fund continues to deeply strategize for 2024. Keep an eye out for details via your inbox tomorrow.

Housekeeping: Mailchimp was down system-wide for a period of time yesterday, you may have received emails at sporadic times once MC was operable again! We seem to be back up and running just fine now.

Recommended Reading:

• Super Micro Q2 2024 Earnings: The AI Bullet Train
• Microsoft Fiscal Q2 Earnings: Accelerating Growth, AI in the Spotlight
• AMD Q4 Pre-Earnings Report: $2 Billion in FY2024 is the GPU Baseline
• Tesla Q4: Moving from Margin Issue to Revenue Growth Issue

What we want to see from AMD this year, and why the company has a solid shot at bringing the heat with Nvidia.

There are also a few major positives that are in AMD’s favor – some of these were listed in our July write-up on AMD’s AI strategy:

• Demand is too high for GPUs with long lead times, this is an excellent window of time for a competitor to enter the picture.
• The MI300s should be able to compete on performance once the GPUs are benchmarked as AMD’s GPUs power the world’s largest supercomputers.
• AMD is exceptional at undercutting on price. This is primarily how AMD overtook Intel coupled with a better design (the Zen 2 architecture)
• AMD’s designs are excellent at improving power efficiency. Power efficiency is important for total cost of ownership. Not only will AMD’s GPUs likely be cheaper (no confirmation on pricing just yet) but they will also cost less to own over a four-year life span.
• Hyperscalers will support competition to Nvidia. You can think of Nvidia as more of a frenemy to Big Tech. This is due to pricing power, CUDA being closed source, and also now Nvidia will be competing with Big Tech in some areas. For example, Omniverse will compete with Meta’s metaverse ambitions. For the MI300 release, AMD is primarily focused on hyperscalers with the CDNA GPUs and not consumer-level RDNA GPUs.

Here are the challenges AMD faces:

• Lacks a popular software platform and CUDA competitor. AMD’s recently released software platform ROCM is promising but is no CUDA.
• AMD is later to market on AI acceleration in terms of GPUs. Although AMD has accomplished what is nearly impossible by being a second-place contender that crushed first-place Intel, the reality is that being in second place is a major obstacle.
• On that note, the company has its hands full competing against Intel on CPUs. It will now go up against Nvidia on GPUs. Lisa Su is one of the best CEOs in the history of the tech industry, but can she and her team take on both at the same time? 

Revenue and EPS:

AMD bottomed in June with (-18%) growth for revenue of $5.4 billion. The company reported growth of 4% YoY in the June quarter for revenue of $5.8 billion.

• In the upcoming December quarter, AMD is expected to report $6.14 billion for growth of 9.64%. This is within range of what management guided last quarter:
• “For the fourth quarter of 2023, AMD expects revenue to be approximately $6.1 billion, plus or minus $300 million. At the mid-point of the revenue range, this represents year-over-year growth of 9% and sequential growth of 5.2%.”
• Next quarter, AMD is expected to report revenue of $5.78B for growth of 7.97%.
• Note, revenue has been revised downward recently as we had estimates at 15.65% following the last earnings report. As a reminder, AMD’s stock was rocky last earnings report as it sold off based on the print reflecting a Q4 miss, the stock later recouped when it was clarified the miss was not coming from the data center, rather the gaming sector and the embedded segment are weighing on revenue.

AMD is expected to double adjusted EPS over the next seven quarters with estimates at $0.77 this quarter and $0.68 next quarter.

Margins:

AMD guided for gross margin of 51.5% this quarter for adjusted gross profit of $3.14B. This is in line with previous quarters.

Adjusted operating margin was guided to be 23% with $1.74B in opex, which leaves adjusted operating income of $1.4 billion. This will be higher than the previous three quarters, and flat YoY.

Last quarter, adjusted net margin was 5% for adjusted net income of $1.13B. This has been trending upward and reflects the rebound in revenue.

Cash:

Operating cash flow last quarter was $421 million for a 7% margin. Free cash flow was $297 million for a 5% margin. The company has cash and short term investments of $5.8 billion and debt of $2.47 billion.

Revenue Segments:

Data Center:

Last quarter, data center reported growth of $1.6 billion. From there, management has guided data center and the Client segment to be “up by strong double-digit percentage. Sequentially, expect Data Center segment to grow by strong double-digit percentage.”

As stated in our previous earnings write-up, it was confirmed the Q4 data center will grow 50% QoQ for an estimated $2.4 billion. To jog your memory, for Q4, the $400 million in GPUs are mainly from the El Capitan supercomputer.

Per the opening comments last quarter: “Based on the rapid progress we are making with our AI road map execution and purchase commitments from cloud customers, we now expect Data Center GPU revenue to be approximately $400 million in the fourth quarter and exceed $2 billion in 2024 as revenue ramps throughout the year. This growth would make MI300 the fastest product to ramp to $1 billion in sales in AMD history.”

As you’ll recall, this comment was important because it means commercial customers will contribute in 2024. This is primarily what the market will be watching – not only data center growth but any color provided for GPUs. Right now, $2 billion is the benchmark – let’s see if AMD can give us a higher number for FY2024.

Client Segment:

Last quarter, the Client segment reported revenue of $1.5 billion, which was up 42% YoY and 46% QoQ driven by Ryzen mobile processor sales. Management has stated the Client segment is also expected to fully rebound by a “strong double-digit percentage.” Also, management stated that sequentially, “client segment revenue to increase.”

Gaming Segment:

Last quarter, the gaming segment reported (-8%) YoY and was down (-5%) QoQ due “to a decline in semi-custom revenue partially offset by an increase in Radeon GPU sales.” This quarter, gaming is expected “to decline by double-digit percentage”

Embedded Revenue:

Last quarter, Embedded reported (-5%) YoY and was down (-15%) QoQ. This was due to “an inventory correction at customers in several end markets.” The guide for this quarter is that the Embedded segment will decline “due to additional softening of demand in the embedded market. Sequentially, the embedded segment is expected to decline by double-digit percentage.”

More comments on the $2B

Toshiya Hari:

[…] My first one is on the Data Center GPU business. You talked about '24 revenue potentially exceeding $2 billion. I was hoping you could provide a little bit more color. What percentage of this is AI versus supercomputing or other applications?

Lisa Su:

Your question as to how the revenue evolves, so the way to think about it is, in the fourth quarter, we said revenue would be approximately $400 million, and that's mostly HPC with some — the start of our AI ramp. And then as we go into the first quarter, we actually expect revenue to be approximately similar in that $400 million range. And that will be mostly AI so with a very small piece being HPC. And as we go through 2024, we would expect revenue to continue to ramp quarterly, and again, it will be mostly AI.

The CEO let a comment slip that it would be “greater than $2 billion” for next year, and given how careful this management team is, I do think it’s important to note here:

Lisa Su:

Sure, Aaron. So, we've been planning the supply chain for the last year and we're always planning for success. So, certainly, for the current forecast of greater than $2 billion, we have adequate supply. But we have also planned for a supply chain forecast that could be significantly higher than that, and we would continue to work with customers to build that out.

For our purposes, as far as where this can go, the management team goes back to quoting 50% CAGR in this segment over the next few years: “So, I think we are big believers in the strength of the market. We previously said we believe that the compound annual growth rate could be 50% over the next three or four years.”

Keep an Eye on PCs:

Per the last write-up:

What is a bit unfortunate is that the gaming segment and embedded is weak, and these two segments overshadow AMD continuing to take market share on the CPU data center, and the company’s highly anticipated answer to Nvidia’s H100s.

Per the CFO’s opening remarks: “In the fourth quarter, we expect to benefit from strong Data Center and Client momentum, driven by MI300 AI accelerated ramp and the strength of our high-performance leadership Zen 4 family of products despite lower sales in the Gaming segment and additional softening of demand in the embedded market.” 

What is quite fortunate, however, is that some of AMD’s AI story is undercover, which is the PC and mobile market. There’s a bonus waiting for AMD investors as the AI story plays out, and while data center GPUs take up all of the attention, there is another powerful AI trend that is silently building strength in the background. I mentioned this in a previous write-up: “When discussing AMD’s AI opportunity, it is vitally important that we not lose sight of the opportunity AMD will have to expand its AI portfolio to the Client Segment.” This has already begun with the Ryzen AI on-chip accelerator contributing to the rebound in the client segment this quarter.

From the CEO in the last earnings report: “What I'm most excited about in PCs is actually the AI PC. I think the AI PC opportunity is an opportunity to redefine what PCs are in terms of productivity tool and really sort of operating on sort of user data. And so, I think we're at the beginning of a wave there. We're investing heavily in Ryzen AI and the opportunity to really broaden sort of the AI capabilities of PCs going forward.”

Our post-earnings report will hit your inboxes tomorrow night.

Additional Reading:

AMD Q3 Earnings: $2B in GPU Revenue for 2024 

AMD Q3 Pre-Earnings: With Bated Breath for Q4 Commentary

Supermicro has produced a neck-breaking 1-month return of 84% in four weeks, if we assume it opens at $547 tomorrow. This is exceptional as QQQs are only up 4%. As a reminder, it’s been one of the best performing stocks for two years in a row. Supermicro personifies the saying “winners keep winning.”

Last quarter, we had stated that Super Micro’s guidance appeared to be conservative: “By far, the most important question on the call was if management was being conservative in their fiscal year guide OR are there challenges ahead for the March and June quarter? Management provided a straightforward answer that Q4 and the fiscal year guides are conservative, implying that we have chance for a beat again in the near-term.”

The CEO further repeated the word “conservative” a few times last quarter. We like this as it creates trust with the management team, especially as SMCI was being doubted in a bout of weakness for the stock during the last report, being down (-12.7%) that month. We were able to rely on management’s comments irrespective of what the market was doing, and this is our preferred path.

The word “conservative” was used again, and an analyst attempted to model how SMCI could exit the year. If the analyst is correct in modeling the opportunity, then there’s roughly 60% room in the stock’s valuation. Each investor will need to decide for themselves how to interpret the Q&A. However, that was my takeaway and it’s likely we take a shot at adding to our position tomorrow.

Before I get too caught up in describing the revenue beat, I do want to say that cash was a blemish for this report and it’s important to file a note that cash flow needs to be watched. We detail this below under the Cash section.

Revenue and EPS:

Similar to Nvidia’s streak last year, analysts cannot keep up with Super Micro this month. As soon as the analyst consensus is revised, Super Micro delivers again.

Here is what that has looked like:

• Originally, the current Q2 quarter consensus was $2.49B at the midpoint with analysts revising it to $3.26B. Super Micro beat this with actual revenue of $3.7B for growth of 103% YoY and 73% QoQ.
• For the forward Q3 quarter, consensus was $2.99B and Super Micro has now guided for revenue of $3.7B to $4.1B, representing YoY growth of 204% at the midpoint.
• Fiscal year estimates were revised upward to $11.5B on January 22nd, yet Super Micro guided for $14.3 billion to $14.7 billion, at the midpoint. This represents growth of 103.6% for the fiscal year. In the opening remarks, the CEO referred to “continued strength in the second half of 2024.”

GAAP EPS for December was $5.10 compared to the analysts’ consensus estimates of $4.90. This is nearly 80% higher sequentially with $2.85 GAAP EPS in the previous quarter and is 62% growth from the year ago quarter. Adjusted EPS was $5.59 for similar YoY and QoQ growth.

Looking forward, next quarter’s GAAP EPS is expected to be between $4.79 and $5.64 for over 240% growth from the year ago quarter. Adjusted EPS of $5.60 at the midpoint will see similar YoY growth.

Margins:

The margins on SMCI are thinner than most semiconductors, and this leads to questions on the earnings call. We detailed you this quarter’s questions about the margins for you below.

• Gross margin was 15.4% for gross profit of $564.4 million
• Operating margin was 10.1% for operating profit of $371.5 million and adjusted OPM was 11.3%
• Net margin was 8% for net profits of $295 million. Adjusted net margin was 9%.

Cash:

Operating cash flow was (-$595) million for a negative margin of (-16.2%). This compares to +12.8% last quarter and +9% in the year ago quarter. Per the CFO: “Cash flow used in operations for Q2 was $595 million compared to cash flow generated by operations of $271 million during the previous quarter. Strong profitability and higher level of accounts payable was offset by higher inventory and accounts receivable due to build plans for Q3 and the timing of shipments during Q2.”

Free cash flow was (-$610) million for a margin of (-16.6%) compared to +12.7% last quarter and +8.4% in the year ago quarter.

The company has $726 million in cash on its balance sheet and $376 million in debt. This is up from $543 million in cash last quarter and net debt of $146 million. This results in net cash position of $350 million compared to a net cash position of $397 million last quarter.

The company was able to increase its cash through an equity offering: “During the quarter, we executed an equity offering and raised approximately $583 million in net proceeds after underwriting discounts and other issuance costs from the sale of 2.3 million shares at a price of $262 per share. The proceeds will be used to strengthen our working capital, enable continued investments in R&D and expand global capacity to fulfill strong demand for our leading platforms.” 

Key Metrics:

Revenue Segments:

• OEM Appliance and Large Data Center segment was $2.15 billion for 59% of revenue. This was up 175% YoY and 83% QoQ. Per management: “Two existing CSP/large data center customers represented 26% and 11% of total revenues for Q2"
• Organic (Enterprise & Channel), AI/ML was $1.48 billion for 40% of revenue, up 55% YoY and up 62% QoQ. This was driven by “enterprise AI and CPU upgrade programs.”
• 5G, Telco and Edge/IoT was 1% of revenue for $35 million. 

Revenue Mix:

• Server and storage systems were $3.4 billion in revenue for growth of 107% YoY and was 94% of Q2 revenue
• Subsystems and Accessories were $229 million, up 61% YoY and was 6% of Q2 revenue.

Inventory: 

Inventory days decreased to 67 days compared to 91 days in the previous quarter. This is aligned with management’s comments on tight supply.

Geography:

All revenues were up by a wide margin QoQ.

• United States was 71% of revenue, slightly down from 76% last quarter. Revenues increased 139% YoY.
• Asia was 18% of revenue, up from 11% last quarter. Revenues increased 98% YoY.
• Europe was 8%, down marginally from 9% last quarter. Revenues decreased 8% YoY.
• ROW was 3% compared to 4% last quarter. Revenues increased 67% YoY.

Earnings Call Q&A

“Conservative” Referenced Again 

My ears perked up when I heard the following from question:

Samik Chatterjee

Got it. And then just this more near-term question when I look at the revenue guide for 3Q and 4Q. Is a step-up here in revenue of about sort of call it $0.5 billion a bit less going from 2Q to 3Q. And then a bigger step-up to get to the mid-point to be annual guide into 4Q, how much of that is driven by just being a bit more cautious about when supply comes in and pushing that the revenue guide a bit more to the 4Q or is that really what the visibility currently of supply of just trying to get sort of what's driving the cadence from 2Q to 3Q to 4Q. And the guide that you provided. Thank you.

David Weigand

Yeah, so Samik, we have a very large and growing backlog, which grew again this quarter. And so really as Charles mentioned earlier, our only constraint is supply. However, the good news is, supply is improving. And so to your point, we have to be somewhat conservative, because we are constrained still by supply. 

Regarding how far and how quick the company can grow, it doesn’t hurt that Super Micro is preparing supply to break the $25 billion revenue mark:

“Today, our production utilization rate is about 65% across our USA, Netherlands and Taiwan facilities, and they are quickly filling. To address this immediate capacity challenge, we are adding two new production facilities and warehouses near our Silicon Valley headquarter, which will be operating in a few months. The new Malaysia facility will focus on expanding our building blocks with lower costs and increased volume, while other new facility will support our annual revenue capacity above $25 billion.”

Later in the call, an analyst modeled SMCI ending the year with a $5.6 billion quarter. The CEO seemed to agree. I’m quoting it here in full so each investor can form their own takeaway.

“Ananda Baruah

Yeah, good afternoon guys. And thanks for taking the question. Appreciate it. Congrats on the really solid execution. Yeah, congrats on that. I guess, two if I could, Charles. And maybe a clarification, I did some math on the 15,000 racks per month. And they came up with — I guess $5.6 billion a quarter, let's call it 5.5%. I guess, plus or minus but that came to $5.6 billion, is that kind of accurate and I guess the question is — if it stood at midyear, you're talking about getting to that point. Is that the kind of run-rate opportunity that we can be thinking about quarterly and not like a guidance, but like an opportunity when you get into sort of the back half of the calendar year. Just wanted to make sure that we're interpreting that kind of accurately and then I have a quick follow-up. Thanks. 

Charles Liang

Yeah, again, we see, we recommend green computing everywhere. That's why wherever, whenever we can help a customer at base, we will. That's why we have been building really large-scale capacity for liquid cooling and other green computing solutions. So yes, that capacity will be huge, but its capacity there, when customer need, we are ready. And indeed our facility also very flexible. Lots of facility can support liquid cooling and air cooler, or combination cooling. So yes, we have a huge capacity ready for growth, but not necessarily all for liquid cooling, they support air cooler or combination hybrid cooling as well.”

This is based on comments from the CEO that: “By this June quarter, we will have high volume, dedicated capacity for manufacturing 100 kilowatt to 120 kilowatt racks with liquid-cooling capabilities, providing DLC, direct liquid cooling racks capacity up to 1,500 racks per month and our total rack production capacity will be up to 5,000 racks per month by then.” This means SMCI will exit the calendar year capable of 14,000 racks.

Questions on the Margins

Notably, Super Micro has weaker margins than was Wall Street prefers. There is always a question about margins on the call. There was a large revenue beat that did not flow through to a higher gross margin or operating margin, and in this Q&A session, the CFO stated: “And so, at this time we are we are growing really quickly. And in order to do that and in order to take market share, we will take opportunities by being more competitive on pricing.” The CEO followed up with: “The good thing is that when we continue to grow our economies of scale, our operation margin indeed will be still able to keep in healthy position.”

Here was a more specific question:

Jon Tanwanteng

Got it, and to ask one of the questions that's been mentioned in a different way, is there a gross margin floor as you pursue this share gain. And when do you see a possible inflection? I'm just wondering what is the limit. When you go in terms of gaining share versus the margin that you generate?

David Weigand

Sure, so we set out a target back in March of 2021 of 14% to 17%. But that's and we've actually done pretty well against that target.

The Mystery 11% Customer

With Intel clearly stumbling (again!), I think the 11% Mystery Customer could be AMD. This is pure speculation, and one we don’t have to wait too long to find out given AMD reports tomorrow night.

Aaron Rakers

Yeah, thanks for taking the questions and also great results. Just curious, when you talk about your customer concentration and the diversity of the business, when you talk about 26% and 11% of your revenue coming from two customers, are those the same customers, like last quarter I think you had a customer that was 25%, or are you seeing these customers kind of bounce around. I guess the simple question is just, is that the same customer 26% and 25%? 

David Weigand

So, Aaron. The 26% customer is the same customer. But the 11% customer is not a new customer, and it's a longer-term customer. But first time in 11% and to your point, yes, we do see a bouncing in and out, and we're very happy. Anytime they do bounce about by the way.

Liquid Cooling Reaches Inflection with Nvidia’s B100s

Super Micro is primarily air cooled right now, yet liquid cooling is growing. Per the CEO in the opening remarks: “By this June quarter, we will have high volume, dedicated capacity for manufacturing 100 kilowatt to 120 kilowatt racks with liquid-cooling capabilities, providing DLC, direct liquid cooling racks capacity up to 1,500 racks per month and our total rack production capacity will be up to 5,000 racks per month by then.” To read more on liquid cooling, reference our previous Super Micro analysis here.Super Micro analysis here.

Here was another comment from the CEO regarding liquid cooling reaching an inflection point with Nvidia’s upcoming release of the B100s:

Quinn Bolton

Okay, got it and then as Charles said, question on liquid cooling. Just as you look forward, you guys are ready, it sounds like the infrastructure may still need some improvements, but I guess as you look at data center customers CSPs that are looking to deploy liquid cooling. Is that sort of does that include current-generation sort of 700-watt, GPUs are, is it really the next generation, the B100s and sort of the 1,000 watt GPU class that really drives the adoption at your CSP customers, drives that need for liquid cooling.

Charles Liang

You are right. In these current 600 watt, 700, watt module, people can still take care very well, we say air conditioning. And that's why people still are comfortable with our traditional air cooler. But when that system grows to 1,000 or even 1,000 watt per module, yes. I mean — I think cooling becomes even much more critical. So, by that time, I believe. Most of the data center will have facility ready for that. So we are very optimistic and very patient to continue to improve our quality, especially that reliability and easy for maintenance. So when customers are ready, we can dwell quickly to support them.

Conclusion:

If the analyst’s model of the opportunity is correct, then Supermicro’s valuation just became quite attractive. The market cap is 27.5 billion at market close, and the run rate would be $22.4 billion in this case, leading to a 1.2 P/S on a company that was trading at a 1.9 P/S, as of market close if we use the previous December quarter estimate of $3.68 billion. This could translate to 60% room in the valuation. For our risk profile purposes, we think it’s worth a shot to add to our position tomorrow and will keep you posted.

Recommended Reading:

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• AMD Q4 Pre-Earnings Report: $2 Billion in FY2024 is the GPU Baseline
• Tesla Q4: Moving from Margin Issue to Revenue Growth Issue
• Netflix Q4: Paid Net Adds Impress, Return to Double-Digit Growth

Micron announced its fiscal Q1 earnings on December 20 after pre-announcing results on November 28. Micron beat on both the top and bottom lines, showed solid improvement in operating cash flow as margins continue to recover, and guided its fiscal Q2 revenue nearly 5% higher than consensus. Shares rose 8.6% following the report, Micron’s largest one-day gain since March 2022, as it offered further evidence that the memory market recovery may be underway with its first YoY revenue increase in six quarters.

With Micron, we need two things to happen. The first, we is want Micron to reach a bottom fundamentally as it’s been in a steep cyclical downturn. We believe the fundamental recovery is squarely underway, and we’ve included the evidence below plus a few charts that best illustrate this on a YoY and QoQ basis. 

Secondly, we want the right entry on Micron which is more challenging than usual at a fundamental bottom given semiconductors had a banner year in 2023. To illustrate, semiconductor ETFs had a banner year in 2023 with SMH +72% and SOX +65% compared to QQQ +54%, this is even with QQQ greatly benefiting from the Mag 7’s brilliant year. Thus, semis are looking exhausted. Micron was up 70% in 2023 despite a steep memory trough; compare this to Nvidia’s fundamental bottom in October of 2022 when the stock was down (-60%) YTD. It’s easy to see why an entry is tricker with Micron in this case.

Micron, like a few other names, appear to have room for one more swing higher, but after this, we believe it is a reasonable probability that we get MU at a lower price. For this reason, the bulk of our targeted allocation is on the side lines, waiting for lower targets. Should AI drive timing that is quicker than getting a lower valuation, then we will buy a breakout. Overall, the bigger plan is to layer-in, which we discuss in more detail below.

For more information on Micron’s thesis and the importance of HBM, reference our analysis Micron: AI Offers a Multifaceted Secular Growth Tailwind, where we highlighted a week prior to earnings that AI offers Micron a secular growth tailwind. Demand for HBM3e chips is expected to surge, a critical component to support faster iterations of AI GPUs from Nvidia and AMD. We’ve also discussed HBM in a previous AMD write-up and Lam Research write-up.

In the earnings call, CEO Sanjay Mehrotra talked up the AI tailwinds, saying “AI has emerged as a significant secular driver that will further bolster the industry towards record revenue TAM in 2025 and drive growth for years to come,”AI has emerged as a significant secular driver that will further bolster the industry towards record revenue TAM in 2025 and drive growth for years to come,” with Micron “well positioned to capitalize on the immense opportunities artificial intelligence is fueling across end markets.”

Revenue and EPS:

There is strong evidence the top line and bottom line has bottomed for Micron. In the most recent report, revenue of $4.73 billion beat estimates by 2% representing YoY growth of 16% and QoQ growth of 18%. GAAP EPS of ($0.95) beat estimates by $0.06, or 6%. This compares to GAAP EPS of ($0.04) in the year ago quarter and ($1.07) last quarter.

Margins:

Margins have gone through a steep cyclical low, with an apparent rebound per last quarter. The GAAP gross margin was (0.7%) in Q1, compared to 21.9% in the year ago quarter. This marked a 1010 bp QoQ improvement from (10.8%) in Q4.

• GAAP operating margin was (23.9%) in Q1, compared to (5.1%) in the year ago quarter. This represented a 1280 bp QoQ improvement from (36.7%) in Q4.
• GAAP net margin was (26.1%), compared to (4.8%) in the year ago quarter. This represented a 960 bp QoQ improvement from (35.7%) in Q4.

Cash and Debt:

Micron’s operating cash flow has bottomed in a major way with Q1 at $1.40 billion, representing YoY growth of 48.6% and QoQ growth of 462.7%.

• Adjusted free cash flow in Q1 was ($0.33 billion), an improvement from ($1.53 billion) in the year ago quarter and ($0.76 billion) in the prior quarter. The negative adjusted FCF was driven primarily by $1.8 billion expenditures in plant, property and equipment.
• Cash, marketable securities, and restricted cash totaled $9.84 billion.
• Debt totaled $13.33 billion. Net debt of $3.56B in 2023 is expected to be slightly worse in 2024 due to capex before it resolves entirely in 2025 due to strong cash flows.

Revenue Mix:

According to Gartner, DRAM will grow by “as much as 87 percent” in 2024. NAND flash memory is projected to decline by (-32.9%) and then “bounce back to grow by about 60 percent” in 2024. Micron’s report shows evidence that DRAM has rebounded while NAND is slower to recover.

Per our AMD write-up, memory is where AI acceleration is fiercely competing in 2024, and this will be reflected in Micron’s DRAM segment. On a QoQ basis, DRAM revenue increased 24.4% QoQ to $3.43 billion. This represents growth of 21.1% YoY.revenue increased 24.4% QoQ to $3.43 billion. This represents growth of 21.1% YoY.

This is where the AI bull thesis is centered. To put it into context, the wafer fab equipment supplier Lam has stated that “AI servers use 8X DRAM and 3X NAND compared to an enterprise class server.” We also stated in the Micron deep dive that: “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.”

NAND revenue increased 11.5% YoY and 2.1% QoQ to $1.23 billion. NAND revenue accounted for 26% of revenue down 400 basis points. Higher average sales prices (ASP) offset lower volume of sales in NAND. An interesting note from the call was that Micron nearly tripled its market share in data center storage SSDs from 11% market share at the midpoint, up from 4% at the midpoint.

The mix of ¾ DRAM and ¼ NAND is typical for Micron

Key Metrics from Business Units:

Compute and Networking Business Unit (CNBU) revenue increased 45% sequentially to $1.74 billion, as data center and client shipments strengthened in Q1. The CEO pointed toward AI driving this strong QoQ growth: “AI-related shipments increased in the data center market and normalized inventory at client customers enabled bit shipment growth.”

Compute and networking is where we want to see more recovery as the segment was as high as $3.8B in Q4 of 2021 and $3.9B in Q3 of 2022, Micron’s cyclical peak.

Micron’s mobile business unit is also showing signs of recovery at $1.3 billion, up 7% QoQ. This is double the revenue from a year ago and is signaling a recovery for mobile. The segment was up 48% QoQ last quarter yet down (-20%). Per the CEO: “Mobile revenue continued to show strength as customer inventories normalized and smartphone units and average memory and storage capacity growth at customers drove demand.”

For reference with Micron’s peak quarters, the mobile segment was at $1.8B in Q4 of 2021 and $1.97B in Q3 of 2022.

• Embedded has also bottomed (likely) at 21% QoQ growth to $1.03 billion. This compares to $1.36B in Q4 of 2021 and $1.4B in Q3 of 2022.
• Storage (SBU) was down (-12%) QoQ to $653 million. This compares to $1.36B in Q4 of 2021.

Q2 Outlook:

Micron guided Q2 revenues of $5.30 billion, +/- $200 million, above the consensus estimate of $5.05 billion and representing YoY growth of 43.5% and QoQ growth of 12.1%.

Q2 is expected to start a 6-quarter streak of quarterly YoY growth above 40%, lasting through Q3 of fiscal 2024.streak of quarterly YoY growth above 40%, lasting through Q3 of fiscal 2024.

GAAP gross margin was guided at 12.0%, +/- 1.5%, pointing to a 1270 bp QoQ improvement at midpoint – quite a rapid recovery from the (10.8%) gross margin reported in fiscal Q4. Micron says it expects this improvement to stem from “sequential price increases and reduced impact from underutilization.” Pricing is expected to be the main driver of this margin improvement.

Non-GAAP EPS was guided ($0.28) +/- $0.07, far above consensus of -$0.61. GAAP EPS was guided at ($0.45) +/- $0.07, a solid improvement from Q1’s ($0.95) print. The guide alludes to a quicker shift back to profitability – Micron was previously expected to shift back to GAAP profitability in fiscal Q4, but that expectation has now shifted one quarter forward, with analysts expecting Micron to report GAAP EPS of $0.01 in fiscal Q3. However, it’s such a fine line that GAAP profitability is not a given in fiscal Q3, especially if gross margins come in below expectations in Q2.

Earnings Call:

AI Commentary incl Nvidia partnership on H200:

Generative AI’s influence on the memory market and on Micron was increasingly clear during the earnings call. Mehrotra explained that “Generative AI use cases are expanding from the data center to the edge, with several recent announcements of AI-enabled PCs, smartphones with on-device AI capabilities, as well as embedded AI in the auto and industrial end markets. … We see a rapid evolution in our customer product roadmaps enabling and leveraging this AI market expansion, which in turn is driving higher capacity, lower power, and increased performance requirements for memory and storage. We expect to increasingly benefit from content growth as these trends in AI gain momentum.”

Mehrotra also shed more light on Micron’s progress in HBM3e development – Micron is “in the final stages of qualifying our industry-leading HBM3E to be used in NVIDIA's next generation Grace Hopper GH200 and H200 platforms.”

Micron also is “on track to begin our HBM3E volume production ramp in early calendar 2024 and to generate several hundred millions of dollars of HBM revenue in fiscal 2024. We expect continued HBM revenue growth in 2025, and we continue to expect that our HBM market share will match our overall DRAM bit share some time in calendar 2025.”

Micron is estimated to have held around 21.5% to 22.8% DRAM market share in calendar Q3, with bit shipment share likely in the same low to mid-20% range – this implies Micron is aiming to capture 20% to 25% of the HBM market in 2025.

HBM revenues are projected to rise as much as 127% YoY in 2024 to $8.9 billion, per TrendForce, potentially reaching more than $15 billion assuming 70% growth in 2025. This equates to a >$3 billion revenue opportunity if Micron can indeed capture more than 20% of the market. HBM’s CAGR is expected to be more than 50% over the next few years.

Higher Prices; Tighter Supply

Aiding Micron’s recovery is improvement in the supply-demand balance, which is resulting in higher prices. The CEO pointed toward higher prices as the reason for the Q2 guidance beat: “The current pricing trajectory has improved our financial outlook for the second quarter and full fiscal year.”

The key to Micron’s potential for a beat for FY2024 is also pricing: “Our leading-edge DRAM and NAND nodes are oversubscribed for the full year. Consequently, we expect prices to increase through calendar 2024, driving improvements in our financial performance.”

Notably, per management, pricing is below industry average right now, yet we are cautiously optimistic it will lead to a positive surprise or two this year for Micron. “We have driven a strong inflection in industry pricing this calendar quarter, which will allow us to benefit from higher prices earlier in our fiscal year compared to our prior plans.”

Pricing is being boosted by tight supply. Because this dynamic is key to Micron’s ability to beat/raise this year, I’m inserting the full quote as it’s a lucid explanation of why 2024 and 2025 could be outliers for memory suppliers, especially those specializing in smaller nodes.

“In last quarter's earnings call, we communicated that we strategically diverted underutilized equipment toward ramping new technology nodes, which will help us increase leading-edge production in a capital-efficient manner. Since the number of wafer processing steps is higher for leading-edge nodes, this approach of diverting underutilized tools to the leading edge meaningfully reduces our overall wafer capacity. Thus, underutilization in our fabs early this fiscal year transitions to structurally lower wafer capacity at higher utilization rates as we move through the fiscal year. Reports indicate that this redeployment of underutilized tools at the leading edge is an industry-wide practice that is likely to constrain industry supply in 2024.

Taking all these factors into account, Micron's bit supply growth in fiscal 2024 is planned to be well below demand growth for both DRAM and NAND, and we expect to decrease our days of inventory in fiscal year 2024. We expect calendar 2024 industry supply to be below demand for both DRAM and NAND, which will result in a contraction of industry inventory levels.”

COGS Increasing

One item to watch as this recovery unfolds is cost of goods sold (COGS). In Q1, COGS increased 49% YoY, the largest YoY jump since 2014. An increased emphasis on HBM3e is a driving factor in COGS rising rapidly, as HBM3e development is more costly (Micron says HBM is “consuming more than 2 times the wafer supply as D5 to produce a given number of bits”) but likely comes with a much higher ASP.

For 2024 and 2025, this may be alleviated by tight supply and higher prices. Per the CEO: “[…] we have tightness on our leading-edge nodes. They are already in short supply and inventories will continue to improve for us. And all of this results in overall healthy dynamics for pricing improvements, profitability improvements, and revenue opportunity growth in the backdrop of demand drivers, AI being a dominant demand driver across the end markets.”

However, eventually, inventory may build and the margins will be something to watch as we go along in the long-term. This won’t be a problem in 2024 or 2025 per management comments and analyst consensus. 

Risks:

The predominant risk for Micron is that it’s in third place behind Samsung and SK Hynix. Will AI help propel MU to a higher market share and/or will the emphasis to use fabs on United States soil be a tailwind for Micron? Those are the questions that have to be answered – the rest is quite bullish in terms of product story, what remains is competitive positioning, with Micron up against South Korea’s stronghold in memory.

Per the most recent earnings call, Micron is prepared to compete during the critical moment for memory to enable higher performance and lower energy AI acceleration: “Micron is addressing these exciting opportunities brought on by the proliferation of AI with an industry-leading portfolio of data center solutions, including HBM3E, D5, several types of high-capacity server memory modules, LPDRAM, and data center SSDs. We have received very positive customer feedback on our HBM3E, which has approximately 10% better performance and about 30% lower power consumption compared to competitive offerings of HBM3E.”

To remain further competitive, Micron has also released advanced DDR5 DRAM for CPUs based built on a 1-beta node and a 32Gb monolithic die. This is considered the world’s fastest and lowest latency 128 GB high-capacity modules. Per the earnings report: “Additionally, leading CPU vendors have confirmed validation support for our monolithic-die-based 128GB modules on existing platforms released in 2022 and 2023 as well as upcoming new platforms. This ensures that our offering has a significant TAM that we can address immediately. We expect volume production to start next quarter, with significant growth in fiscal 2025 and beyond.”

Given memory is where AI accelerators are competing in the near-term, Micron’s product road map is one to watch closely to see if the company can maintain market share and/or has the ability to expand.

China is an inherent risk to Micron with decently large exposure and uncertainty regarding the CAC’s decision in March 2023 to prevent critical information infrastructure companies from buying Micron’s chips remains uncertain. In 2023, China accounted for ~$2.18 billion in revenue, or 14% of total revenue, up from 10.8% in 2022 and 8.9% in 2021. Micron said that it believes “approximately half of that China-headquartered customer revenue, which equates to a low-double-digit percentage of our worldwide revenue, is at risk of being impacted.”

Micron Technical Analysis

By Knox Ridley

When analyzing a single stock, I always prefer to look at it within the context of the larger sector. The below chart shows the Philadelphia Stock Exchange Index (PHLX), which is composed of the 30 largest semiconductor companies in the U.S. It provides a decent snapshot into the health of the overall sector.

It currently shows the uptrend off the October 2022 low hitting significant resistance. The 4216 region has been our long-term target for this move higher, which happens to coincide with a 45-degree angle off the COVID low in red. This angle tends to be the dividing line between big trends. More times than not, we see a strong reversal around this angle.

From a cycle perspective, the above chart shows 5 cycles that have had an effect on PHLX. Note how they are clustering underneath price right now. The last time these cycles clustered together was at the 2021 high. More times than not, we tend to see a reversal into these cycles. The fact that both time and price are coming together for the PHLX signals caution here until we see how price reacts at this region.

Many semis have put in a larger top, while some suggest that we could see one more swing high into 2024, Micron being one of them. I do believe that the evidence supports MU putting in a notable top soon – likely in late Jan to late Feb. Once we reverse from this high, how we drop will determine how we buy.

The below chart has these two scenarios mapped out.

The blue count suggests that the drop will be a steep 5 wave pattern. If this happens, we will be targeting between $52 – $44 for the bulk of our buying.

The green count suggests that the drop will be a messy/three wave move. If this happens, we will buy between $65 – $55

The above two scenarios are what bets fit the larger pattern playing out. However, with a move as explosive as AI, we have to account for something more bullish that could alter the price pattern. This would be a vertical breakout above $99-$100. If this happens, you would see buy into that move with a stop just under the $96 region.

If we zoom into MU from the 2021 top, we can get more perspective on what is likely transpiring. It appears like we have an incomplete correction that started at the 2021 top. What gives this away is the uptrend we have seen in 2023. It is a messy/three wave move, which fits best as a correction in a larger downtrend. Until we see a large vertical move over $99-$100, the price action best fits with the blue and green counts I just laid out.

What is concerning in the momentum indicator on the bottom of the chart is in the same position that marked notable swings lower, including the 2021 top. This is happening while MU’s chart has room for, maybe, one more swing higher into the $90 or $92 region. If the next move extends, I’ll be looking for the $94.75 or $99 region for a top to unfold. If we instead break below $74, then I’d consider the top being in, and we will start analyzing the trend to determine where we buy more MU.

Conclusion

Fiscal Q1 offered more evidence that Micron’s recovery is underway, as HBM3e emerges as a significant enabler of generative AI applications and a significant growth driver over the next few years. Micron reported its first YoY increase for quarterly revenue in Q1, breaking a five quarter string of declines. GAAP gross margin is expected to see substantial improvement in fiscal Q2 to the low double-digits, while GAAP EPS is expected to shift back to positive by fiscal Q3. Operating cash flow has improved significantly, with positive free cash flow expected by the end of the fiscal year. Overall, Q1’s beat and raise are setting the stones for a strong fiscal 2024.

We’ve taken our time with this stock and created a game plan, which is detailed for you above. This game plan helps us to buy as low as reasonably possible without missing out on AI-driven price action. Pro Members will have ongoing earnings coverage on Micron and in-depth thematic coverage from our analyst team on Micron and other memory stocks. Advanced Members will receive a real-time trade alert when we layer-in and will receive weekly coverage of Micron in Knox’s webinars. To learn more about Advanced, click here.

I/O Fund Analyst Damien Robbins contributed to this analysis

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