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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