Why Micron Stock Jumped 16%

Micron Technology (NASDAQ: MU) stock surged by about 16% in pre-market trading on Thursday, following a stronger-than-expected Q4 earnings report. Revenue rose 93% year-over-year to $7.75 billion, with adjusted earnings at $1.18 per share. The company is experiencing robust demand for its DRAM memory products and high bandwidth memory (HBM), primarily driven by AI data centers. Additionally, its NAND business achieved record revenue, surpassing $1 billion in quarterly sales for the first time, led by data center SSD sales. Looking ahead, Micron projects Q1 FY’25 revenue (quarter ending November) to be $8.7 billion, plus or minus $200 million, reflecting an 85% plus increase year-over-year at the mid-point. The company also anticipates a Q1 gross margin of 39.5%, a significant improvement from around 1% in the same quarter last year.

MU stock has increased considerably over the last 3-year period. However, the gains have been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 24% in 2021, -46% in 2022, and 72% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, 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?

Micron is the first of the semiconductor giants to publish this earnings season and is seen as a bellwether of sorts for the sector, given its exposure to the PC, smartphone, and server markets. The positive earnings report could drive gains for the likes of Nvidia and Super Micro Computer as well. See our upside scenarios on how  Nvidia Stock Can Surge To $200 and Super Micro stock can rise over 2x to $1,000.

The broader memory market has stabilized slightly following the post-Covid decline, driven by reduced capital spending by general DRAM producers. The surge in generative AI deployments has been the primary driver of demand for memory products. Why is that? Generative AI models require substantial storage, fueling demand for DRAM, while faster memory, such as HBM, is essential for running large language models efficiently. Nvidia, for example, has integrated 33% more content into its latest Blackwell AI systems. As AI models get more sophisticated, moving from just working on text – like the first version of ChatGPT – toward multimedia such as images and video, we could see demand rise even further. However, HBM supply may be constrained as it requires three times more wafers than fifth-generation DRAM to produce the same number of bits. Micron has indicated that its HBM capacity for 2024 and 2025 is fully sold out. HBM memory is also likely to be much more lucrative. Research firm Gartner estimates that the average price of HBM and standard DRAM is about $10.60 and $2.90 per gigabyte respectively, or roughly 3.5x. Margins for HBM are also likely to be significantly thicker. For instance, Micron says that its Q1 2025 gross margins would improve by approximately 300 basis points to 39.5% driven in part by a higher mix of HBM shipments. Although Micron hasn’t spelled out its forecasts for HBM memory sales, it expects the total addressable market for HBM to grow from about $4 billion in 2023 to about $25 billion by 2025.

However, the general-purpose DRAM market is seeing a slowdown. Smartphone sales growth has cooled, and Apple’s latest flagship iPhone 16 devices appear to be receiving a lukewarm response, which could weigh on memory prices. The PC market is also expected to experience only low single-digit growth this year. Although the generative AI trend was expected to drive higher demand from the client side of the market, with consumers opting for high-end PCs and smartphones with AI capabilities, this may take time to materialize.

Micron stock trades at about $111 per share based on the pre-market price. This translates into less than 13x forward earnings. We currently have a $114 price estimate for Micron stock, which is slightly ahead of the current market price. See our analysis of Micron’s valuation: Expensive or cheap for more details.

While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 9/26/2024
[2] Cumulative total returns since the end of 2016

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