Micron ($MU) – Earnings Summary – June 29, 2024
Important Definitions – Micron’s two revenue buckets:
- Dynamic Random-Access Memory (DRAM): DRAM is volatile memory storage. It stores data in usage, but does not maintain that storage when turned off. That’s what is meant by “volatile memory.” This is best for faster data processing needs.
- NAND (Not And) Flash: This is non-volatile memory storage. When devices are powered off, storage is maintained. It’s best for data that isn’t frequently needed for querying. Processing speeds and costs are lower than DRAM.
Note that Micron is especially cyclical within the violently fluctuating semiconductor space. DRAM and NAND are both commoditized and lower differentiation products vs. custom chipsets. This is why the firm generally trades for such low earnings multiples. This is not a structural growth story but will track the A.I. cycle. Q3 2023 was a poor demand environment for its products. Q3 2022 boasted a stronger backdrop for the firm. Q3 2024 was somewhere in between those two periods. With this context, you can see how drastically the backdrop impacts this firm’s results.
Results
- Revenue beat estimates by 2.0% and beat revenue guidance by 3.2%.
- DRAM and NAND unit shipment levels were within wide guidance ranges – with strong pricing trends for both.
- Beat 28.1% GPM guidance by 160 bps.
- Beat $852 million EBIT estimates by 10.4% and beat EBIT guidance by 24.0%.
- Met $0.30 GAAP EPS estimates and beat guidance by $0.13.
- Beat $0.53 EPS estimates by $0.07 and beat guidance by $0.09.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Guidance & Valuation
For the 4th quarter, Micron’s revenue guidance was roughly in line. It also guided to a 34.5% non-GAAP GPM, which ever-so-slightly missed estimates. We could call the miss a rounding error. Conversely, its $1.08 Q4 EPS guidance beat $1.02 estimates by $0.06.
It sees a significant revenue record in FY 2025. This implies at least 23% Y/Y growth, although the sell-side wants closer to 50% Y/Y growth.
Other guidance items:
- Maintained full year industry demand growth for DRAM and NAND in the mid-teens percentage range.
- Does not see any more inventory write-downs coming, which means no one-off impacts to GPM coming.
- Will spend $8 billion in CapEx this year and a lot more in 2025. This is to support construction in Idaho and New York (more later). That & high bandwidth memory (HBM) R&D make up most of these CapEx plans.
Micron trades for 17x next 12-month EPS and 14x fiscal year 2025 EPS. EPS is rapidly recovering from deeply negative territory last year.
Balance Sheet
- $8.4 billion in cash & equivalents.
- $8.5 billion in inventory vs. $8.4 billion Y/Y.
- $775 million in long-term investments.
- About $13.3 billion in total debt.
- Diluted share count rose by 3.8% Y/Y.
- Dividends rose by 1.6% Y/Y.
Call & Release Highlights
AI-Related Products:
Its HBM offering is ideal for high-performance computing. It offers more capacity for data transfer vs. competing DRAM products. It also boasts better energy efficiency, and so lower TCO vs. alternatives. Interestingly, per Micron, HBM deploys vertical “stacking” of DRAM hardware, which shrinks the needed footprint and improves performance and efficiency. The firm’s latest HBM product (HBM3E) offers 30% lower power consumption vs. competition. Shipments on this product began during the quarter and led to $100 million in revenue already. That will ramp to billions for FY 2025.
Micron’s Dual In-Line Memory Modules (DIMMs) are another type of memory product for servers (or overarching AI factories as Jensen Huang calls them) needing massive amounts of energy. Micron’s ability to deliver these needs in a more cost-effective manner is highly relevant in today’s GenAI and cost conscious world. These are often less expensive than its HBM product on a per unit basis, but boast inferior latency and bandwidth. If a use case demands optimal speed and efficiency, with lower cost sensitivity, HBM is better.
Next, Micron’s Data Center Solid State Drive (DC SSD) is also finding great success in the current environment. DC SSD is non-volatile. This can often be the most expensive per unit means of storage (as it stores everything even after a device or server is turned off). It stores everything so that products like DIMMs can more easily and effectively query needed data on command. These products are complementary.
“Data center SSD is in the midst of a strong demand recovery as customers have worked through their 2023 inventory. Demand is improving due to AI infrastructure, and supplemented by the start of a recovery of traditional compute and storage infrastructure demand. Micron is gaining share.”
CEO Sanjay Mehrotra
AI-Related Demand & Pricing Environment:
The products discussed above are the centerpieces driving Micron’s success in AI and high-performance computing. Supply scarcity continues to foster a favorable pricing environment within memory, which should last at least through the next few quarters. 80% of its DRAM production is now on its leading-edge (or most advanced) fabrication technology, with 90% of its NAND production on leading-edge technology too. Its newest process using extreme ultraviolet lithography is on track for scaled production next year. Newer technology and better supply utilization are helping Micron drive material DRAM and NAND cost reductions for 2024. In the hyper-commoditized memory chip world, input cost edges are everything.
Data center revenue rose by 50% Q/Q thanks to GenAI demand, with this growth being highly accretive to overall margins. That was wonderful context from the team, as we’ve seen complementary players like Dell selling their AI servers for razor thin margins due to high competition. Micron expects a continued mix shift towards these products, driving more operating leverage into next year as it continues to take more share.
“AI will require training ever-increasing model sizes with trillions of parameters and sophisticated servers for inferencing…. This trend will drive significant growth in the demand for DRAM and NAND… Micron will [likely] be one of the biggest beneficiaries.”
CEO Sanjay Mehrotra
CHIPS Act:
Micron secured preliminary terms for a $6.1 billion grant under the CHIPS and Science Act. This will help fund its manufacturing capacity expansion in Idaho and New York. Between these incentives, technological cost edges, more R&D and eliminating redundant location costs, Micron sees itself leading in memory manufacturing efficiency. It also sees Idaho and New York as foundational investments to support the next several cycles of growth.
Customer Inventory Levels:
Micron’s PC and smartphone customers have built more inventory amid rising prices. They are also aware of the risk of DRAM and NAND scarcity as datacenter demand diminishes supply availability. Micron is seeing many customers respond to this by locking in longer term agreements through 2025 and securing access to its leading-edge chips. This is why Micron is so confident in a significant revenue record for the next fiscal year. It is not normal for it to offer guidance that far out.
The Underrated PC Opportunity & Smartphones:
Data center architecture has stolen the show in the semiconductor space since the GenAI explosion commenced. Still, data centers will certainly not be the only use case going forward. Planned AI PCs will use 40% to 80% more DRAM than current models. For this reason, Micron expects AI PCs to support accelerating growth next year and feels poised to capture that demand. Smartphones are on track to grow in the low-to-mid single digit percentage range for the year.
Take
This was not at all a bad quarter. Nvidia is the issue. When a company delivers such a historic rise in growth and margin profile due to GenAI, it leads many others to believe “who else can enjoy some of the fun?” Whether it’s AMD, Marvel, Qualcomm or Micron, the resulting financial impacts have simply been far more normal than for Nvidia. Earnings reactions are a byproduct of results and positioning vs. baked-in expectations. Nvidia led to those baked-in expectations becoming perhaps a tad unrealistic for other players in the space. Micron’s stock was on a tear, the multiple was well ahead of multi-year averages, outperformance for the quarter was modest and the guidance was in-line. If you were a long term believer heading into this report, nothing in these results should be overly alarming. If you’re a trader, the short-term weakness does make some sense.
