Micron beat analyst consensus estimates and offered better-than-expected guidance. The company expects strong growth to continue in the next quarter, driven by increased DRAM and NAND shipments. The management also highlighted strong AI data center demand and the ramp-up of HBM products.
Management was quite optimistic about the opportunity in HBM, by increasing the TAM for calendar year 2025 from over $30 billion to over $35 billion. The management also reiterated that the company’s 2025 HBM production is fully allocated and is in discussion with customers for the calendar year 2026.
In the past, Micron did not report the AI HBM revenue. Management highlighted that the company reported record data center revenue, with the HBM revenue growing more than 50% sequentially, to over $1 billion in their recent quarter. The HBM shipments were ahead of the company’s projections, demonstrating strong execution of the ongoing ramp.
The management also highlighted that the company’s HBM3E 8-high is designed into NVIDIA's GB200 system, and the HBM3E 12-high is designed into the GB300. Micron also initiated volume shipments to the third large HBM3E customer in FQ2 and anticipates additional customers over time. At the recent GTC 2025 event, Micron showcased its complete AI memory and storage portfolio to support AI from the data center to the edge. The company’s High-performance Micron 9550 NVMe and Micron 7450 NVMe SSDs are included on the GB200 NVL72 recommended vendor list. They expect multibillion dollars in HBM revenue in FY2025. Micron’s HBM4 is expected to ramp in volume in calendar year 2026 and is 60% faster than HBM3E.
This quarter, revenue grew by 38.3% YoY yet was down (-7.5%) QoQ to $8.05 billion, beating estimates by 2%. Adjusted EPS grew by 271.4% YoY to $1.56, beating estimates by 9.5%. However, the company’s gross margins were below the guidance due to a higher mix of consumer products and lower NAND prices.
The FQ3 revenue guidance is $8.8 billion, representing YoY growth of 29.2% and 9.3% QoQ growth at the midpoint, beating estimates by 3.8%. Adjusted EPS guide is $1.57, representing YoY growth of 153.2%, beating estimates by 3.3%.
Micron’s valuation remains low with a P/E ratio of 22.7 and a forward P/E ratio of 13.6. Its P/S ratio is 3.4 and a forward P/S ratio is 3. A few reasons that Micron’s valuation is lower than AI peers is likely due to memory being more cyclical and Micron seeing fierce competition with SK Hynix and Samsung, which leads to more commoditized pricing. There is China, as well, which represents 12% of revenue – although this is not likely to be a leading reason for the lower valuation. Micron's earnings power also fluctuates wildly at times due to the cyclical nature of the memory market. More recently, the increasing consumer revenue mix and lower NAND prices have also led to analysts reducing estimates, which have also led to lower valuations.
What Micron will need to answer is if the cyclical nature of the memory market will smooth out as the dollar content of memory is rapidly increasing. AI training and inference rely heavily on high-bandwidth memory (HBM) for the massive memory bandwidth that complex models require. AI servers also use more DRAM and NAND than a traditional server. These are reasons that Micron’s cyclical fundamentals could become more secular as the AI economy is built out.
Ultimately, we want to keep a close eye on companies that are at the forefront of AI yet have valuations that do not reflect this outsized growth. Below are notes that discuss the most recent earnings report as well as references to our previous coverage.
Bullish HBM commentary
Management set out an optimistic tone about the opportunity in HBM and increased the TAM to over $35 billion for CY2025, up 17% from the previous estimate provided during FQ1 results. As previously noted, the company’s 2025 HBM production was fully allocated and are further seeing strong demand for the HBM supply in 2026 and are in discussions with the customers on agreements for their calendar 2026 HBM demand.
“We see strong demand for HBM and have once again increased our HBM TAM estimate for calendar 2025 to over $35 billion. We remain on track to reach HBM share similar to our overall DRAM supply share on a run rate basis in calendar Q4 2025. As previously mentioned, Micron has sold out of our HBM output in calendar 2025. We are seeing strong demand for our HBM supply in 2026 and are in discussions with our customers on agreements for their calendar 2026 HBM demand.”
They also highlighted that they have initiated volume shipments to the third large HBM3E customer. “We are making good progress on additional platform and customer qualifications with HBM. Micron's HBM3E 8-high is designed into NVIDIA's GB200 system, and our HBM3E 12-high is designed into the GB300. In fiscal Q2, we initiated volume shipments to our third large HBM3E customer and anticipate additional customers over time. We expect multibillion dollars in HBM revenue in fiscal 2025.”
We covered this in the past when we stated in our December post-earnings update that “Management pointed out they are raising their view of server unit percentage growth for the current year and they anticipate server unit growth to continue in 2025. The CEO also stated that HBM has exceeded their plans due to solid execution on yield and capacity ramps.” We also stated that the next catalyst would be the availability of HBM4 in CY2026.
Similarly, we highlighted during the September post-earning update that the company delivered strong results due to robust data center/HBM revenue. We informed our members in June 2024 that that HBM is sold out for calendar year 2025 with pricing already contracted for.
Market Outlook
Management increased the 2025 DRAM bit shipment forecast from mid-teens percentage range to mid-to high teens percentage range due to the growing adoption of AI in smartphone & PC devices and HBM is also a strong contributor to the bit demand growth.
“Now turning to our market outlook. Calendar 2024 DRAM bit demand growth was in the high teens, consistent with our prior expectations. Calendar 2024 NAND bit demand growth was approximately 10%, slightly below our previous view of low double digits. We forecast calendar 2025 DRAM bit demand growth in the mid- to high teens percentage range and NAND in the low double-digit percentage range. Over the medium term, we expect industry bit demand growth of mid-teens CAGR for both DRAM and NAND.”
HBM4E to consume higher silicon
Management mentioned that HBM4E will consume 4x the amount of silicon compared to D5. “As noted before, HBM3E consumes 3x the amount of silicon compared to D5 to produce the same number of bits. Looking ahead, we expect the trade ratio to increase with HBM4 and then again with HBM4E when we expect it to exceed 4:1. The sustained and significant increase in silicon intensity for the foreseeable future contributes to tightness for industry leading-edge node supply and constraints capacity for non-HBM products.”
Growth in the second half of CY2025
Management mentioned that the transition from 8-high offering to 12-high offerings will increase revenue in the second half of the year due to premium pricing. Also, shipping to the third large customer will also lead to a revenue increase in the second half of the year. However, revenue growth rate has peaked for now and will decelerate in the year's second half.
Q: CJ Muse (Analyst)
“Very helpful. And a quick follow-up. You revised your HBM industry revenue outlook higher. Curious if there's a framework on how you're thinking about kind of first half versus second half for the industry?
A: Sanjay Mehrotra (CEO)
Of course, the revenue in the second half as you go from 8-high to 12-high continues to go up because 12-high will be carrying a certain premium over 8-high. So if we have projected more than $35 billion for calendar year 2025 and a bigger portion of that in second half of calendar '25 versus first half. And more than $35 billion, of course, is the industry TAM for HBM that we have referred to here.
And I'll just point out that, of course, with respect to HBM, there is expansion of HBM customer base taking place. Micron itself, now we are shipping to a third large customer that we have begun shipping our products to. So that also is contributing to the growth in HBM revenue in the second half as the customer base expands.”
Financials:
Revenue growth momentum eases
FQ2 revenue grew by 38.3% YoY and down (-7.5%) QoQ to $8.05 billion, beating estimates by 2%, driven by strong HBM revenue that grew more than 50% sequentially to over $1 billion.
FQ2 DRAM revenue grew by 47% YoY to $6.1 billion, representing 76% of total revenue. DRAM revenue was down (- 4%) QoQ, with bit shipments decreasing in the high single-digit percentage range and prices increasing in the mid-single-digit percentage range because of improving portfolio mix.
The company’s DRAM revenue was down sequentially due to the decrease in bit shipments. However, management expects bit shipment to increase in Q3, which will likely help with the DRAM revenue recovery.
FQ2 NAND revenue grew by 18% YoY to $1.9 billion, representing 23% of total revenue. NAND revenue was down (-17%) QoQ, with bit shipments modestly higher and prices decreasing in the high-teens percentage range. FQ2 bit NAND bit shipments exceeded management expectations, driven by higher consumer-oriented shipments. Management anticipates growth in DRAM and NAND bit shipments in FQ3.
- The company expects strong growth to continue in the next quarter with revenue guidance of $8.8 billion, representing YoY growth of 29.2% and 9.3% QoQ growth at the midpoint, beating estimates by 3.8%. However, revenue growth rate has peaked for now and will decelerate in the calendar year's second half.
- Analysts expect revenue to grow 25.3% YoY to $9.71 billion in FQ4 and 23.8% growth in FQ1.
- For FY2025 ending August, analysts expect revenue to grow 39.1% YoY to $34.93 billion and 28.6% growth to $44.93 billion in FY2026.
Strong YoY Margin Expansion, Yet Consumer Weighs on Margins
The company’s margins are improving on a YoY basis driven by operating leverage. However, margins are down sequentially, and the company’s gross margins were below guidance due to a higher mix of consumer products and lower NAND prices. This was partially offset by high-value DRAM portfolio mix. Management expects gross margins to be down sequentially in FQ3 due to higher consumer mix, NAND underutilization charges, and NAND pricing weakness. This was also highlighted by the management during the Wolfe Conference last month. It was further clarified during the earnings call Q&A that gross margins will improve in FQ4.
Q: Harlan Sur (Analyst)
"Back in mid-February at an investor conference, I know the team had walked us through the dynamics on a weaker gross margin profile during the May quarter. That's playing out, but you did anticipate an improved gross margin profile beyond this quarter, fiscal Q3. So is that still the case that we should see gross margin improvements maybe starting in fiscal Q4 and potentially beyond? And is that a possible data center and your consumer-related products? Is that across total DRAM and your NAND segments? Any color here would be great.
A: Mark Murphy (CFO)
Sure, Harlan, this is Mark. I'll take that. So let me just make some comments about the third quarter. It is down sequentially, as we had indicated in the conference. And again, as we said in the conference down primarily due to higher mix of consumer-oriented volumes, lower CQ1 pricing on consumer-oriented markets and industry and can just generally, all that partially offset by higher HBM. We do see — while down, conditions have improved since those public comments. And the updated view is reflected in the guide today.
Now we're not providing guidance on the fourth quarter. However, we do expect gross margin to be up somewhat. There's always tailwinds and headwinds. As you know, on tailwinds, we do expect market conditions to improve. We do expect HBM and other high-value products to grow and contribute to mix improvement…. So in short, we would expect fourth quarter margins to be up somewhat from third quarter.”
- FQ2 gross margin was 36.8% compared to 18.5% in the same period last year and 38.4% in the FQ1. It was lower than the guidance of 37.5% due to a higher consumer mix. Management guidance for the next quarter is 35.5%.
- FQ2 adjusted gross margin was 37.9% compared to 20% in the same period last year and 39.5% in the FQ1, missing guidance of 38.5%. Management guidance for next quarter is 36.5%.
- FQ2 operating margin was 22% compared to 3.3% in the same period last year and 25% in FQ1, driven by operating leverage. Management guide for the next quarter is 21.1%.
- FQ2 adjusted operating margin was 24.9% compared to 3.5% in the same period last year and 27.5% in the FQ1. Management guide for the next quarter is 23.7%.
- FQ2 net margin was 19.7% or $1.58 billion compared to 13.6% or $793 million in the same period last year. FQ2 adjusted net margin was 22.1% or $1.78 billion compared to $476 million or 8.2% of revenue in the same period last year.
Adj.EPS growth of 271%
FQ2 GAAP EPS grew by 98.6% YoY to $1.41, beating estimates by 11.4%. Adjusted EPS grew by 271.4% YoY to $1.56, beating estimates by 9.5% driven by strong operating leverage.
- Management adjusted EPS guide is $1.57 for FQ3, representing a YoY growth of 153.2%, beating estimates by 3.3%.
- Analysts expect adjusted EPS to grow 73.7% YoY to $2.05 in FQ4 and 41.3% growth in FQ1.
- For the FY2025 ending August, analysts expect adjusted EPS to grow 419.6% YoY to $6.76 and 64.7% YoY growth to $11.12 in FY2026. However, due to a higher consumer revenue mix and lower NAND prices, analysts have reduced the estimates significantly for this FY2025 from 783% expected growth in June 2024 to the current expected growth of 420%, with some of the growth being pushed to the FY2026.
Cash Flow and Balance Sheet
The company’s cash flow improved, driven by higher profits.
- FQ2 operating cash flow margin was 49% or $3.94 billion compared to 20.9% or $1.22 billion in the same period last year.
- FQ2 adjusted free cash flow margin was 10.6% or $857 million compared to ($29 million) or (-0.5%) in the same period last year.
- FQ2 capex was $4.06 billion, up 193% YoY. The company received government subsidies of $963 million (23.7% of capex) in FQ2 compared to $149 million in the same period last year. Management expects the FQ3 capex to be over $3.0 billion and the FY2025 capex to be about $14 billion. Management mentioned in the earnings call that the majority of the FY2025 capex is to support the multiyear facility investments for DRAM and HBM manufacturing, including the Idaho fab, Singapore HBM advanced packaging facility, and Taiwan DRAM test facility.
- Earlier in December last year, the U.S. Department of Commerce finalized the $6.17 billion government subsidies under the Chips Act. It will disburse the funds based on Micron’s completion of project milestones. The $6.17 billion funding package, representing roughly 5% of the total estimated capital expenditure in New York and Idaho, will support the construction of two fabs in Clay, New York, and one in Boise, Idaho. This funding is part of Micron's $125 billion capex plan for both states over the next two decades.
- The company had cash and investments of $9.6 billion and debt of $14.36 billion compared to $8.74 billion and $13.8 billion in the previous quarter.
- During FQ2, Micron extended the debt maturities through a $1 billion 10-year senior note offering and a $1.7 billion term loan, with proceeds used to pay down notes maturing in 2026 and the previous term loan balance.
- The company’s inventory increased to $9.0 billion from $8.71 billion in FQ1 to support the strong AI-demand. Management mentioned that the inventory levels will normalize in a couple of quarters.
Business Units
Compute and Networking (CNBU)Compute and Networking (CNBU)
Compute and Networking revenue grew by 109% YoY and 4% QoQ to $4.56 billion. For the third consecutive quarter, CNBU revenue reached a new quarterly record, driven by a more than 50% sequential increase in HBM revenue to over $1 billion. However, the CNBU revenue growth decelerated from 153% and 152% growth in the last two quarters and is likely tied to the Blackwell delays.
The company’s CEO Sanjay Mehrotra, highlighted in the earnings call, “Our HBM shipments were ahead of our plans, demonstrating strong execution of our ongoing ramp. The combination of our revenue from high-capacity DRAM modules and our industry-leading LPDRAM for the data center also exceeded the $1 billion milestone for the quarter.”
Mobile (MBU)Mobile (MBU)
FQ2 Mobile Business Unit revenue was down (-33%) YoY and (-30%) sequentially to $1.07 billion due to inventory corrections.
Embedded (EBU)Embedded (EBU)
FQ2 Embedded business unit revenue was down (-8%) YoY and (-3%) QoQ to $1.03 billion. It was lower due to inventory correction in the company’s automotive customers. The CEO highlighted in the earnings call that the customers are nearing the completion of inventory adjustments. “Automotive OEMs, industrial and consumer embedded customers are in the later stages of adjusting their inventory levels. In automotive, which comprises the largest portion of our EBU revenue, memory and storage content per car continues to increase as AI-enabled in-vehicle infotainment systems become more enriched and driver assistance functions become more capable.”
Storage (SBU)Storage (SBU)
Revenue for the Storage business unit was $1.4 billion, up 54% YoY and down (-20%) sequentially. The sequential decline in SBU revenue was driven primarily by lower storage investments from data center customers after several quarters of very strong growth and the overall NAND industry pricing.
Earnings Call Notes:
AI PCs and Mobile
Management expects mid-single-digit unit PC growth in calendar 2025, with a stronger second half. AI PCs require increased DRAM, with a minimum of 16GB of DRAM compared to 12GB content last year. They expect smartphone unit volume growth in calendar 2025 to remain at low single-digit percentages and customer inventories are improving. AI smartphones require DRAM capacities of 12GB or higher compared to 8GB in last year’s models.
“We expect the PC market to grow mid-single digits in unit terms in calendar 2025, with growth weighted to the second half of calendar 2025. The Windows 10 end of life in October 2025, combined with an aging installed base and the desire amongst customers to ensure that their PC hardware specs can support compelling AI applications in the future, are key catalysts that drive this growth.
AI PCs required a minimum of 16 gigabytes of DRAM, with many models requiring even higher memory versus the average 12 gigabyte PC content last year. During the quarter, we sampled our 16-gigabit 1 gamma-based D5 products to PC clients. In NAND, we launched our Gen9 based 4600 performance SSDs, the fastest in the world for the client market, and completed qualifications of our 2650 mainstream SSDs at multiple PC OEMs.
Turning to mobile. Our expectations for smartphone unit volume growth in calendar 2025 remain at low single-digit percentages. Smartphone customer inventory dynamics have played out as anticipated, leading to mobile DRAM and NAND bit shipment growth in our fiscal Q3. AI adoption continues to be a significant driver for increased mobile DRAM demand.
AI-capable flagship phones increasingly feature DRAM capacities of 12 gigabyte or higher compared to the 8 gigabyte in last year's models. Smartphone OEMs are using Micron's industry-leading 9.6 gigabit per second LP5X DRAM to improve AI performance, delivering up to 20% more tokens per second than those using legacy speed grades on the same SoC.”
Tariffs
Management mentioned that they plan to pass the costs of tariffs to the customers. China accounted for 12% of FY2024 revenue. “On tariffs, Micron serves as the U.S. importer of record for a very limited volume of products that would be subject to newly announced tariffs on Canada, Mexico and China. We continue to monitor the possibility of future tariffs and are prepared to work with our customers and suppliers to understand future tariff effects and supply chain options that may arise. Where tariffs do have an impact, we intend to pass those costs along to our customers.”
Valuation:
The company is trading at a P/E ratio of 22.7 and a forward P/E ratio of 13.6. Micron’s P/S ratio is 3.4 and a forward P/S ratio is 3.0. It is trading below its five-year average P/S ratio of 3.7. A few reasons for Micron’s low valuation are likely due to memory being more cyclical and Micron seeing fierce competition with SK Hynix and Samsung, which leads to more commoditized pricing. More recently, the increasing consumer revenue mix and lower NAND prices have also led to analysts reducing estimates, which have also led to lower valuations.
Conclusion
Micron beat the top-line and bottom-line analyst consensus estimates. However, the consumer revenue mix, NAND underutilization charges, and NAND pricing weakness weigh on the gross margins.
This stock would be a breakout buy rather than a counter-trend entry as we’d like to see the market begin to recognize Micron as being more secular once the HBM-related revenue begins to rival the other more cyclical revenue segments.
I/O Fund Equity Analyst Royston Roche contributed to this report.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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