Story Stocks®
Updated: 26-Sep-24 11:12 ET
Micron's strong beat-and-raise earnings report reminds the market that it's a leading AI play (MU)
Following a disappointing 3Q24 earnings report in late June in which it merely guided Q4 revenue in line with analysts' estimates, the sky-high expectations, and the stock price, for memory chip maker Micron (MU) came crashing down. After the close last night, though, MU revealed that it was premature to throw in the towel as robust AI server demand fueled an impressive beat-and-raise Q4 performance that is not only catapulting MU shares sharply higher but is also underpinning strength across the entire semiconductor space.
In the aftermath of that Q3 earnings report, the main narrative surrounding MU was that while its AI-based growth prospects were solid, thanks to the rising momentum in its data center market, the company's exposure to the more sluggish PC and smartphone end markets would hold it back. Inventory levels have been elevated, especially within MU's PC customer base, putting downward pressure on DRAM volumes, and soft consumer spending trends have weighed on the smartphone market.
Although that narrative was partly correct -- the PC and smartphone markets indeed remain in a bit of a lull -- it failed to grasp just how strong the AI business is for MU, as illustrated by the following data points:
In the aftermath of that Q3 earnings report, the main narrative surrounding MU was that while its AI-based growth prospects were solid, thanks to the rising momentum in its data center market, the company's exposure to the more sluggish PC and smartphone end markets would hold it back. Inventory levels have been elevated, especially within MU's PC customer base, putting downward pressure on DRAM volumes, and soft consumer spending trends have weighed on the smartphone market.
Although that narrative was partly correct -- the PC and smartphone markets indeed remain in a bit of a lull -- it failed to grasp just how strong the AI business is for MU, as illustrated by the following data points:
- The company's mix of data center revenue reached a record level in 2024 but it's just scratching the surface in terms of potential revenue contribution. MU expects the total addressable market (TAM) for its high-bandwidth memory (HBM) chips to explode to over $25.0 bln in 2025, up from $4.0 bln this year.
- CEO Sanjay Mehrotra reiterated that HBM chips are sold out for calendar 2024 and 2025 and that the company is making good progress on increasing its output capacity. MU is constructing a new fab in Idaho, which is expected to be operational in 2025, and it's also working through the permitting process for another facility in New York.
- In addition to HBM, the company's data center portfolio also includes high-capacity D5 and LP5 products, and SSD solutions. MU expects each of these product categories to generate multiple billions of dollars in revenue in FY25.
- Bolstered by the above factors, the company's 1Q25 revenue guidance of $8.50-$8.90 bln easily beat expectations with the midpoint of the guidance range equating to yr/yr growth of 85%.
The cherry on top is that MU anticipates PC unit growth to accelerate in the back half of CY25 as the PC replacement cycle gains steam with the launch of new AI PCs and the Windows 12 operating system. This, in turn, should lead to healthier inventory levels at PC manufacturers, providing another catalyst for DRAM volumes and pricing. The bottom line, though, is that MU's beat-and-raise report put the company back on the map as a leading AI play.
