Up 12% This Year On AI Tailwinds, Will Micron Stock See Further Gains Following Q2 Results?

Micron Technology (NASDAQ: MU) is expected to publish its Q2 2024 results around March 20, reporting on a quarter that is likely to see the company benefit from stronger pricing for DRAM memory and higher demand for High Bandwidth Memory targeted at AI applications.  Micron has guided for revenues of between $5.1 billion to $5.5 billion, marking an increase of about 42% versus the last year, while projecting an adjusted net loss of $0.28 per share, at the mid-point. So what are some of the trends that are likely to drive Micron’s earnings for the quarter?

Memory prices have been trending higher, driven by a slew of factors. Firstly, memory majors including Micron and Samsung have pared back on their investment in memory capacity and have been rationalizing their production in recent months and this has been helping prices.  Moreover, the memory market is also seeing demand from the replenishment of memory inventory by smartphone OEMs. The PC market is also seeing a rebound.  According to research firm Canalys, PC shipments are likely to approach 267 million in 2024, marking an increase of 8% from 2023. Moreover, the advent of generative AI tools such as the popular ChatGPT is also likely to drive up memory demand since these algorithms typically require more storage and DRAM resources compared to other types of algorithms. AI requires high-bandwidth memory (HBM) for training large language models and inferencing quickly, and Micron has not been typically viewed as a leader in this space. However, the company recently announced the specifications for its latest HBM3 second-generation memory which is considerably ahead of its rivals, with shipments estimated to start in early 2024. We also expect Micron’s margins to see a slight recovery. The company has guided gross margins of between 11.5% to 14.5% for the quarter, up from just about 1% in Q1 FY’24 and -9% in Q4 FY’23.

However, the increase in MU stock has been far from consistent. Returns for the stock were 24% in 2021, -46% in 2022, and 71% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that MU underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MU face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Now Micron has also seen some headwinds as well. Last May, the Chinese government barred the use of Micron products in key infrastructure applications in the country, citing national security risks. Micron has indicated that it expects a revenue hit to the tune of a low single to a high single-digit percentage. There are also concerns about the global economy, amid high interest rates and relatively stubborn inflation, which could weigh on consumer electronics sales. That being said, we think the overall recovery in the memory markets and the potential surge in demand from the generative AI trend could help to offset this in the medium term.  We currently have a $74 price estimate for Micron stock, which is about 20% below the current market price. We will be revisiting our price estimate post-earnings. See our analysis of Micron’s valuation: Expensive or cheap for more details.

[1] Returns as of 3/6/2024
[2] Cumulative total returns since the end of 2016

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