Micron's rally: Can it persist?

Memory chipmaker Micron has finally hopped aboard the AI bandwagon, with its stock surging 14% following an impressive earnings report, hitting an all-time high. The company reported revenue of $5.82 billion, up 23% quarter-over-quarter and a whopping 57.7% year-over-year, surpassing expectations of $5.35 billion. Earnings per share came in at 42 cents, defying forecasts of a 25 cent loss, showcasing a strong performance. The significant sequential revenue growth echoes shades of Nvidia. Micron attributes its stellar results to exceptional execution in pricing, product strength, and operations. The current product mix is expected to drive outstanding performance in H2 2024, positioning the company as one of the major beneficiaries in the semiconductor industry under the AI umbrella.

Looking ahead, Micron projects Q4 revenue of $6.6 billion, representing a 13.4% sequential increase and a staggering 76% year-over-year growth, outpacing expectations of $6.02 billion.

Micron's profitability recovery has arrived a quarter earlier than anticipated. Adjusted operating income stood at $204 million, far exceeding analysts' forecast of a $263 million loss, largely driven by AI's influence. Year-to-date, Micron has gained 33.4%, while over the past year, it has appreciated 89%, solidifying its position as a sought-after AI chip stock, albeit still trailing Nvidia but recently catching up with AMD.

As a long-standing provider of memory and flash storage chips, Micron naturally occupies a niche in the AI wave. Last month, the company announced plans to manufacture its own High Bandwidth Memory (HBM) chips, set to be incorporated into Nvidia's cutting-edge H200 systems. The recent unveiling of Blackwell also promises a 33% increase in HBM usage compared to its predecessor, directly benefiting Micron.

Capacity for HBM memory in 2024 is already fully sold out, with "the vast majority" of 2025 capacity allocated to customers. Management expects chip prices to rise each quarter, reiterating expectations of record revenue in FY2025, doubling quarterly cloud revenue growth, and noting that customer inventories have dwindled, necessitating restocking with new products.

Micron's core business remains Dynamic Random-Access Memory (DRAM). From a production standpoint, it takes the capacity to produce two DRAM wafers to make one HBM wafer. The soaring demand for HBM driven by AI will squeeze DRAM capacity, raising chip prices, although the impact is difficult to quantify, it is undoubtedly positive for Micron.

According to TrendForce, in 2023, SK Hynix commanded 46%-49% of the HBM market, with Samsung holding a similar share, while Micron accounted for just 4%-6%. Despite its small market share, considering the sensitivity around AI chips, there is a possibility that tech giants may prefer sourcing from U.S.-based suppliers like Micron.

In summary, while new demands and products render Micron's future performance somewhat unpredictable, as long as AI fervor persists, the company's earnings should continue to display robust performance. Moreover, Micron's uniqueness deserves mention. With the HBM market largely dominated by non-U.S.-listed Samsung and SK Hynix, Micron stands as the sole option for U.S. investors seeking exposure to HBM dynamics, potentially conferring an additional premium on the stock and bolstering its price performance.