Shares of Micron Technology (MU 2.92%) rallied 16.5% this week through 12:30 p.m. ET Friday, according to data from S&P Global Market Intelligence.
Micron is one of only three major producers of DRAM memory, which is a key building block of all computing systems, and of course especially artificial intelligence (AI) systems. On Wednesday, the company released its fiscal second-quarter earnings report, which blew away expectations. Furthermore, guidance also showed strong sequential growth, as memory prices appear to be rocketing higher. It looks to be the beginning of a very strong up cycle.
The cyclical Micron has depressing lows but euphoric highs
In the second fiscal quarter, Micron reported $5.82 billion in revenue, well above the roughly $5.3 billion expected, while non-GAAP (adjusted) earnings per share flipped to positive territory for the first time in six quarters at $0.42, as opposed to expectations of a $0.28 loss.
While those earnings figures were helped by a favorable tax benefit, they would have still been positive even without the benefit and well ahead of analyst estimates. Micron also guided for a massive $6.6 billion in revenue, plus or minus $200 million, for the current quarter, which would be up 13.4% sequentially at the midpoint, good for an annualized rate of 65%. But given that Micron just beat the top end of the guidance it gave three months ago by about $300 million, it wouldn't be shocking to see revenue vault up to $7 billion or above this quarter.
Micron and the memory industry more broadly had a strong up cycle during the pandemic, only to have one of its most severe downturns ever in the aftermath. The combination of higher interest rates, a hangover in purchases of PCs and smartphones after the height of the pandemic lockdowns, as well as a prolonged recession in China caused a massive drop in memory demand and an increase in inventories, which also led to a massive drop in memory pricing.
However, usually severe busts lead to severe booms, and vice-versa. After six quarters of negative earnings, it appears the memory industry may be in for a very strong boom. The DRAM industry only has three large players, and the NAND industry only has five, outside China. This concentrated oligopoly of suppliers all greatly reduced their output amid the cash crunch.
But the demand for a special kind of DRAM called high-bandwidth memory (HBM) for AI applications is exacerbating the current supply constraints across the industry. On the conference call with analysts, Micron noted that it and its competitors had repurposed semiconductor equipment to HBM lines, as the manufacturing of HBM requires much more equipment to make a wafer.
By doing that, it actually takes away supply capacity of other DRAM nodes, limiting supply of other standard DDR4 and DDR5 DRAM. Management noted that while it had cut back on capacity utilization during the downturn, its HBM and other leading-edge nodes were now fully utilized, even though Micron's total wafer capacity is actually down double digits from peak 2022 levels.
Meanwhile, inventories have normalized across most end markets, and demand may be picking up across the memory sector, including PCs and smartphones. That's especially true as the pandemic-era purchases are likely aging at this point, allowing for across-the-board demand. Add in a dovish statement from the Federal Reserve this week on interest rates, and the demand picture looks even better.
No wonder Micron saw DRAM pricing up in the high teens and NAND flash pricing up in the high 30% range over the course of a single quarter! Annualize those rates, and you can see why Micron investors are so enthusiastic about the results.
Furthermore, even though memory prices are booming right now, Micron says it will stay disciplined with its capital spending, sticking with its prior fiscal 2024 target of $7.5 billion to $8 billion. So it's also a strong sign that Micron and rivals are remaining disciplined in their supply growth even as the upturn begins, as they attempt to prevent another oversupply and crash in the future.
Image source: Getty Images.
Does Micron have the best HBM on the market?
Micron was actually behind Korean competitor SK Hynix in HBM production at the start of the AI race, as HBM had been a niche product up until generative AI took the world by storm. However, on Feb. 26, Micron commenced high-volume production of its HBM3E product, which boasts 30% less power consumption than the leading market product today despite lightning-fast speeds.
Micron noted on the call that its HBM3E will be part of the upcoming Nvidia H200 Tensor Core GPUs, and will likely be qualified for additional AI systems later this year. Moreover, it has also begun sampling its new "12-highs" HBM3E, which offers 50% more capacity per cube than the HBM in high-volume manufacturing today. Overall, Micron expects to achieve the same market share with HBM as it has for the broader memory industry sometime in 2025.
Micron has impressed in recent years with its technology progressing at a faster pace than rivals, so I have to think it will do the same with HBM. But perhaps more importantly, it appears the memory industry is now entering a strong up cycle. How long it lasts and how much profitability can be sustained will ultimately be determined by the strength of the overall economy, as well as discipline on the part of Micron and its handful of peers. However, the emergence of AI and HBM means this up cycle could last longer than usual.
Having weathered a disaster in 2022-2023 and come out strong on the other side, it's no wonder Micron's stock is now back at all-time highs.
