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A significantly weaker-than-expected Q2 (Feb) outlook, sparked by softening demand across consumer-oriented markets, is triggering a considerable sell-off in Micron (MU -17%) today. The memory chip manufacturer projected adjusted EPS and revenue alarmingly below consensus, targeting $1.33-1.53 and $7.70-8.10 bln, respectively, both representing sharp slowdowns in growth compared to Q1 (Nov).

MU still enjoyed unwavering demand for AI, a similar theme that took center stage among some of the company's peers recently, including Marvell (MRVL) and Broadcom (AVGO). Unfortunately for MU, unlike its peers, whose AI-related gains offset lingering weaknesses from consumer-facing end markets, it could not dodge the adverse impacts of sluggish PC, smartphone, and automotive demand.

• MU warned last quarter that customer inventory reductions in its consumer segments combined with seasonality would adversely affect Q2 (Feb) bit shipments. As such, MU's performance in Q1 was unaffected, leading to adjusted EPS of $1.79 on revs of $8.71 bln, an 84.3% jump yr/yr. DRAM and NAND revenue each surged by over 80%, supported by healthy demand in data center and high bandwidth memory (HBM) -- used extensively in AI workloads.
• AI remained the star in Q1 as training model sizes continued to increase. MU upgraded its view of server unit percentage growth for CY24 to the low teens and sees momentum continuing in 2025. HBM revs more than doubled sequentially in Q1, supporting MU's increased TAM estimates for 2025 to now exceed $30 bln, up from its $25 bln prediction last quarter.
• Casting a dark cloud on the AI highlights was lackluster PC, mobile, and automotive demand. The PC refresh cycle is unfolding gradually; MU expects volume growth to be flattish in CY24, below its prior outlook. Management is still bullish on AI PC adoption over time, which will require more DRAM content, given the resources AI consumes.
• In mobile, smartphone volumes are tracking in line with MU's expectations, aided by AI adoption, which also drives DRAM content growth. However, bit shipments will be weighted toward the back half of FY25 (Aug), consistent with release schedules from major smartphone manufacturers.
• Automotive production is slowing, and consumers are shifting their tastes toward value-trim vehicles from premium models and EVs. This creates speedbumps for MU as it reduces memory and storage content growth, resulting in inventory adjustments at automotive OEMs. MU is still optimistic that advanced driver assistance systems, infotainment, and AI adoption across the automotive industry will propel long-term content growth. However, MU does not see a recovery until later in 2025.

A silver lining from MU's troubling Q2 guidance is that it might be a short-lived setback as the company expects a return to growth within its consumer-facing segments during the second half of FY25. At the same time, there are no slowdowns present within the AI space, which is now comprising over half of the company's total revenue. Nevertheless, MU's downbeat outlook is spooking investors today as there are no guarantees that demand will pick up across the PC, smartphone, and automotive industries, especially with the Federal Reserve signaling fewer-than-expected interest rate cuts next year while the cumulative effects of inflation linger in the background.