A brutal post-pandemic downturn in the memory-chip markets is finally coming to an end. Global shipments of PCs are expected to return to growth next year, and inventory levels across the PC supply chain are mostly back to normal. Smartphone shipments could rise, as well, after a prolonged slump, and the market for servers will be buoyed by insatiable demand for artificial intelligence (AI)-computing capacity.
These trends showed up in Micron's (MU 2.92%) fiscal first-quarter earnings report in the form of higher revenue, an improving gross margin, and rising average selling prices for DRAM and NAND chips. While 2024 will be a recovery year for Micron, the company expects 2025 to be a record year for the memory-chip industry.
Things are getting better
Micron is still losing money, but there's now a light at the end of the tunnel. Revenue grew 16% year over year in the first quarter to $4.7 billion, driven mostly by sales of DRAM chips. DRAM bit shipments jumped more than 20% from the previous quarter, and average selling prices edged higher. The NAND business was mixed, with bit shipments dropping by a mid-teens percentage and average selling prices soaring by about 20%.
Micron's GAAP gross margin remained in negative territory in the first quarter, although just barely. The company posted a net loss of $1.2 billion, and adjusted free cash flow was negative $333 million.
All these metrics are moving in the right direction, and Micron's guidance calls for substantial improvements in the fiscal second quarter. Revenue is expected to rise to $5.3 billion, and the adjusted gross margin should jump to positive 13%. The company still expects to report a net loss, but it will be much smaller.
Micron has cut production throughout the downturn, as have others in the industry. These production cuts have helped bring supply and demand back into balance, and the company is aiming to remain disciplined in the year ahead. Overall capital spending in fiscal 2024 will be slightly higher than fiscal 2023, but only because Micron is ramping up production of high-bandwidth memory chips destined for AI accelerators. Capital spending on wafer fab equipment is still expected to decline year over year.
On top of keeping capital spending in check, Micron is reallocating equipment that has been underutilized toward new manufacturing nodes, which will further reduce Micron's production capacity. This should help keep pricing at a healthy level, although one aggressive competitor could spoil the party.
A middle-of-the-road valuation
There are a few important things to know about Micron. First, the company largely manufactures commodity products, which means pricing is primarily a function of supply and demand. Second, the company doesn't have a durable competitive advantage over its peers. This means Micron doesn't have any real pricing power.
Micron's bottom line can swing widely from year to year, so trying to value the stock based on a snapshot of the company's earnings isn't a very useful thing to do. The price-to-book value is a useful ratio, although it can only tell you whether Micron stock is expensive or cheap, relative to times in the past. Looking at this metric, Micron's valuation is somewhere in the middle.
MU Price to Book Value data by YCharts.
It's not unreasonable to buy Micron stock, especially considering that demand for the types of memory chips required for AI servers is likely to explode. But the stock isn't an obvious bargain, and there are better deals available.
