Micron: Storage Prices Surge, Unleashing the Battle for HBM3E

Micron Technology (MU.O) released its fiscal second quarter earnings report for the 2024 fiscal year on the morning of March 21, 2024, after the U.S. stock market closed. The key points are as follows:

1. Overall Performance: Revenue & Gross Margin Exceed Expectations. Micron Technology reported a total revenue of $58.24 billion in the second quarter of the 2024 fiscal year, a year-on-year increase of 57.7%, exceeding market expectations ($53.43 billion). The accelerated revenue growth in this quarter was mainly driven by the strong performance of the company's core businesses in DRAM and NAND. Micron Technology (Micron Tech.US) achieved a net profit of $7.93 billion in the second quarter of the 2024 fiscal year, turning losses into profits, mainly due to industry recovery and non-operating projects. After excluding the impact of non-operating projects, the company's core operating profit for this quarter also returned to a breakeven point.

2. Business Segments: DRAM and NAND Experience Price Increases. DRAM and NAND account for 98% of the company's revenue, and both business segments saw significant growth in this quarter. Specifically, the growth in DRAM and NAND in this quarter was mainly driven by supply shortages, leading to double-digit price increases for both product categories.

3. Outlook for the Next Quarter: Revenue for the third quarter of the 2024 fiscal year is expected to be $64-68 billion (a 76% year-on-year increase), exceeding market consensus ($59.74 billion); Gross margin (GAAP) for the quarter is expected to be 24% to 27%, with a continued increase in gross margin compared to the previous quarter, exceeding market consensus (20.4%).

Dolphin's Overall View:

Driven by the recovery of the DRAM and NAND businesses, Micron Technology's performance in this quarter exceeded expectations across the board. With the rise in product prices, revenue and gross margin both exceeded expectations, and the company's core operating profit for this quarter returned to a breakeven point. Although inventory data for this quarter remains relatively high, the company did not continue to write down inventory. Dolphin believes that the company's inventory structure has improved. Overall, the company and the storage industry have emerged from the trough.

Taking into account the guidance provided by the company for the next quarter, revenue for the third quarter of the 2024 fiscal year is expected to be $64-68 billion (a 76% year-on-year increase), exceeding market consensus ($59.74 billion); Gross margin (GAAP) for the quarter is expected to be 24% to 27%, also exceeding market consensus (20.4%).Dolphin believes that the price increase of storage products is expected to continue to drive the recovery of the company's performance.

In addition to the industry's beta for the recovery, the company's HBM3E product is expected to bring its own alpha. The current mass production of the company's HBM3E product is expected to increase the company's market share in data centers and AI markets, while also contributing new increments to the company.

Overall, the company's performance is showing a continuous positive trend. Due to the clear cyclical nature of the storage industry, the company is expected to enter a profit cycle next. Therefore, the valuation of the company should not focus on the current period, but from a cyclical perspective. In the long run, the current market value of the company corresponds to a PE ratio of 20-25 times. Although better-than-expected financial performance will drive the stock price up in the short term, the current market value of $125 billion has already factored in expectations of a cyclical recovery. To further push the stock price up, products like HBM3E need to deliver better-than-expected performance.

Here is Dolphin's specific analysis of Micron's financial report:

I. Overall Performance: Revenue & Gross Margin, Exceeding Expectations Again

1.1 Revenue

Micron's total revenue for the second quarter of the 2024 fiscal year was $5.824 billion, a year-on-year increase of 57.7%, exceeding market expectations ($5.343 billion). The revenue accelerated this quarter, mainly driven by the strong growth of the company's core DRAM and NAND businesses. After hitting the bottom of the storage cycle, both DRAM and NAND prices have significantly increased.

1.2 Gross Margin

Micron achieved a gross profit of $1.079 billion in the second quarter of the 2024 fiscal year, with a significant increase in quarterly gross profit.

The company's gross margin for this quarter was 18.5%, driven by rising product prices and product mix. Although the company's current inventory is still at $8.443 billion, it has improved its inventory structure. Data center inventory will return to normal in the first half of the year.

Although Micron's current inventory value is not low, the company has not made inventory write-downs. With the recovery in demand, Dolphin believes that the company's inventory structure has become more reasonable. With rising product prices, the company's gross margin for the next quarter is expected to return to above 25%.

1.3 Operating Expenses

Micron's operating expenses for the second quarter of the 2024 fiscal year were $1.112 billion, a year-on-year increase of 9.1%. The operating expense ratio for this quarter remained stable at 19.1%In terms of specific expenses:

1) Sales and Administrative Expenses: In this quarter, it amounted to USD 2.80 billion, a year-on-year increase of 21.2%. The sales and administrative expense ratio was 4.8%, a year-on-year decrease of 1.5 percentage points. The increase in the proportion was mainly due to the increase in revenue. There is a certain relationship between sales expenses and revenue performance, while administrative expenses are relatively fixed.

2) Research and Development Expenses: In this quarter, it was USD 8.32 billion, a year-on-year increase of 5.6%. Research and development expenses are the largest source of operating expenses for the company, and the research and development expense ratio remained at 14.3% this quarter. As a technology company, the company places more emphasis on research and development capabilities, and the company's research and development expenses remained relatively stable.

1.4 Net Profit Situation

Micron Technology achieved a net profit of USD 793 million in the second quarter of the 2024 fiscal year, turning losses into profits. In this quarter, the company's net profit margin was 13.6%. The company's profitability this quarter mainly came from the industry recovery and non-operating projects driving it.

After excluding the impact of non-operating projects, the company's core operating profit this quarter has also roughly returned to the breakeven point, and the company has emerged from the cyclical trough.

Business Segmentation: DRAM and NAND, Entering a Price Increase Trend

From the previous in-depth analysis of Micron by Dolphin Jun on " Micron: Has the Storage Chip Giant Survived the Winter?", the company's largest source of revenue is storage chips. From the latest financial report, DRAM and NAND are still the company's most important sources of revenue, accounting for a combined 98%. Therefore, the changes in Micron's business are mainly dependent on the situation of the DRAM and NAND businesses.

DRAM

DRAM is the company's largest source of revenue, accounting for over 70%. In this quarter, the company's DRAM business revenue rebounded to USD 4.158 billion, a year-on-year increase of 52.7%. This was mainly driven by the increase in product volume and prices due to the industry recovery.

Micron's DRAM business grew by 21.3% quarter-on-quarter this quarter, with shipment volume showing a low single-digit increase, while prices saw a double-digit increaseDRAM Industry

Dolphin believes that the DRAM industry has shown signs of recovery this quarter, with overall product prices experiencing a certain increase. Taking DDR4 8G (1G*8) eTT as an example, the product price has risen from a low point of $1.17 in early December 2023 to around $1.39 currently. Dolphin expects that the average price of DRAM products will continue to rise in the next financial report.

2.2 NAND

NAND is the company's second largest source of revenue, accounting for nearly 30%. In this quarter, the company's NAND business revenue reached $15.67 billion, a 77% year-on-year increase. The growth of NAND this quarter exceeded that of DRAM, mainly due to a greater impact from price increases.

Micron's NAND business grew by 27.4% quarter-on-quarter this quarter. Although the shipment volume of NAND this quarter still experienced a single-digit decline, the average price of the company's NAND products increased by over 30%.

Dolphin's research on Micron and semiconductor-related articles can be traced back to:

Earnings Season

December 21, 2023 Earnings Review "Micron Technology: Storage Winter is Over, Price Increases Welcome Spring"

December 21, 2023 Conference Call "Gross Margin, Continuous Improvement Expected (Micron 1QFY24 Conference Call Summary)"

September 28, 2023 Earnings Review "Micron Technology: Virtual Warmth, Real Downturn"

September 28, 2023 Conference Call "No More Inventory Challenges, When Will Prices Rise?"

June 29, 2023 Earnings Review "Micron Technology: AI Wave Rising, Turning Point Approaching?"

June 29, 2023 Conference Call "End of Inventory Clearance, AI Gaining Momentum Again (Micron 3QFY23 Conference Call)"March 29, 2023 Conference Call "Experiencing the Worst Period, Semiconductors May See Dawn (Micron FY23Q2 Conference Call)"

March 29, 2023 Financial Report Review "Micron's 'Big Bleeding', Perhaps Not a Bad Thing"

In-depth

April 13, 2023 "Micron: GPT Cools Down, No Hindrance to Storage Bottoming Out and Rebounding"

March 15, 2023 "Micron: Have the Winter Days of Storage Chip Giants Come to an End?"

Semiconductor Industry Research

March 7, 2023 "NVIDIA: After the Magical Performance, Will There Really Be a Great Turnaround?"

December 29, 2022 Semiconductor Industry Review "Semiconductor Avalanche? True Resilience Comes After the Most Brutal Decline"

June 24, 2022 Semiconductor Industry Review "Canceling Orders, Is the Semiconductor Industry Really Going to 'Change'?"

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