Micron Technology (MU 1.46%) has been a red-hot tech stock to own over the past year. Its shares have surged arond 300%, and that's even with a recent pullback in the markets. Its market cap is now around $430 billion, making it one of the largest tech companies in the world, as its storage and memory products have experienced strong demand due to artificial intelligence (AI).
The tech company recently released its latest quarterly numbers, confirming that demand is indeed still scorching hot. Even as prices have been rising, Micron is not having any issues selling its products. Its top line roughly tripled last quarter. What's particularly notable, however, is that while its sales have been booming, its earnings have accelerated even faster. Here's why that's the case, and also, why it might be an issue in future quarters.
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Micron's margins have expanded significantly
As prices have gone up for memory and storage products, this has enabled Micron's gross margins to become much higher. Gross margin is revenue less cost of goods sold, and with an increase in demand, you'd normally expect to see both revenue and costs rise at comparable rates. But when prices are skyrocketing, revenue increases much faster, and thus margins become much stronger.
In its most recent quarter, which ended on Feb. 26, Micron's gross margin was $17.8 billion on revenue of $23.9 billion, equating to 74% of revenue left over after cost of goods sold. A year ago, however, its gross margin percentage was just under 37%. It has effectively doubled since then. It's a key reason why the company's bottom line was so massive. Net income totaled $13.8 billion, up 771% from $1.6 billion in the prior-year period.
Consider, however, if its margin was 37%, as it was a year ago. Then, the company's gross margin would have been around $8.8 billion -- roughly half of what it was this past quarter. Its bottom line would have been much smaller.
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Why this could be a problem for Micron in future quarters
Right now, business is booming, and things are looking great for Micron. But the problem is that a year from now, it's going to be reporting results that will go up against these latest ones, which include the beefed-up margins. If there's any softness in price that causes its margins to shrink, that can end up diminishing its overall earnings growth. At the very least, it will be incredibly difficult to replicate this type of profit growth without even stronger sales.
Investors may be growing concerned about the role that rising prices are having on Micron's overall growth, and what might happen if they end up coming down in the future. There is a shortage of memory and storage products today, but that's not always going to be the case.
Micron's stock looks incredibly cheap today, trading at only seven times its estimated future earnings. But that's based on analyst projections, and that could change if they see memory and storage prices coming down. The stock might continue to do well this year as demand remains strong, but investors should tread carefully with Micron, as it may prove to be volatile.
