Micron Technology's third-quarter report exceeded expectations, but the guidance for the next quarter is not very promising. After-hours trading saw a drop of over 9%. | Financial Report Insights

After the U.S. stock market closed on Wednesday, June 26, the leading memory chip manufacturer Micron Technology released its financial results for the third quarter of the 2024 fiscal year ending in May.

Although all financial indicators in the financial report were better than expected, the guidance for the next fiscal quarter was only "in line with market expectations," which was not impressive enough. This caused Micron Technology's stock to drop more than 9% after hours.

Before the financial report was released on Wednesday, Micron Technology rose by 0.9%, falling 7% from the historical closing high set on Tuesday. The stock has risen nearly 67% year-to-date and doubled in price over the past 12 months.

Micron Technology Q3 Financial Report Exceeds Expectations Across the Board, Next Quarter Guidance Considered "Not Impressive Enough"

Due to the continuous development in the AI field and the increasing demand for higher-performance memory solutions, AI demand has been driving continuous growth in data center revenue. Micron Technology's total revenue for the third fiscal quarter was $6.81 billion, an 81.6% year-on-year increase from $3.75 billion in the same period last year, surpassing analysts' expectations of $6.67 billion and the previous quarter's revenue of $5.82 billion.

The net profit for the quarter was $332 million, with earnings per share of $0.30, far exceeding the net loss of $1.9 billion or loss per share of $1.73 in the same period last year. The adjusted EPS for the quarter was $0.62 per share, higher than the market's expectation of $0.51. The quarterly operating profit was $941 million, also higher than the expected $869.1 million, with an adjusted operating profit margin of 28.1%, better than the expected 27.2%.

This financial report also exceeded the company's previous official guidance: a 76% year-on-year increase in revenue to $6.6 billion for the third fiscal quarter, a non-GAAP gross margin of 26.5%, adjusted EPS of $0.45, and GAAP EPS of $0.17.

Micron Technology expects adjusted revenue for the next fiscal quarter ending in August to be in the range of $7.4 billion to $7.8 billion (i.e., $7.6 billion ± $200 million), with the midpoint of the range basically meeting analysts' expectations of $7.58 billion. The expected adjusted EPS is $1.08 ± $0.08, with a market expectation of $1.02, and the expected adjusted operating profit margin is 33.5% to 35.5%, with a market expectation of 34.5% The company also stated that it expects to continue raising prices in the 2024 fiscal year, "significantly increase capital expenditures next year", and expects capital expenditures in the 2025 fiscal year to account for 30% to 40% of revenue. Specifically, the operating cash flow in the third quarter was $2.48 billion, lower than analysts' expectations of $3.24 billion. The company also mentioned that the industry for DRAM and NAND will be in short supply this year.

Micron Technology CEO Sanjay Mehrotra previously stated when announcing the second-quarter results that the company is "one of the biggest beneficiaries of the semiconductor industry's years of growth opportunities driven by artificial intelligence". In the third quarter report, he continued to emphasize the AI business, but also acknowledged that the smartphone and personal computer markets are still sluggish.

He mentioned that prices for the company's products aimed at artificial intelligence may rise, and the data center business grew by 50% quarter-on-quarter:

"Strong demand for AI-driven data center products has led to tight supply of our leading-edge nodes. Therefore, although short-term demand for personal computers and smartphones remains stable, we expect product prices to continue to rise throughout the full year of 2024."

During a conference call with analysts, company executives stated that orders for high-bandwidth memory (HBM) chips used for AI chips have been sold out/exhausted before 2025; in 2024, there is a shortage of supply, but there is uncertainty in industry and retail demand.

Wall Street's previous expectations for the financial report were too high, especially optimistic about the pricing power of high-bandwidth memory used in AI servers

Wall Street had high expectations for this financial report, believing that Micron Technology would benefit from the continuous growth of PC personal computer and smartphone demand, the reduction of excess memory chip inventory for automotive and industrial customers, and the surge in demand related to artificial intelligence, among other factors.

On one hand, AI servers with strong memory demand are accelerating the purchase of Micron's high-bandwidth memory (HBM), while PCs and smartphones with AI capabilities also require more memory.

Therefore, it is widely expected in the industry that Micron Technology will benefit from the pricing power of DRAM (dynamic random-access memory) and NAND flash memory technology, which are continuously rising in price. Micron previously stated that most of the HBM used in AI servers this year and in 2025 has been sold out. Morgan Stanley also stated that DRAM and NAND storage technology prices will continue to rise until 2025, and even extend to 2026. Citigroup analysts pointed out that considering the rising trend of DRAM prices and Micron Technology's expanding market share and product range in the AI memory field, it is expected that the company's revenue in the fourth quarter will further increase to $8 billion. Based on this, Citigroup has listed Micron Technology as a "top pick" and raised the target price from $150 to $175, representing a 24% upside potential.

The market will also focus on the partnership between Micron Technology and "AI darling" NVIDIA, as Micron Technology produces high-bandwidth memory chips for NVIDIA's AI GPUs. JPMorgan once stated that Micron Technology's HBM is aggressively entering the NVIDIA GPU market and is expected to benefit from NVIDIA's AI revenue in the future. "AI-driven demand is the fastest-growing new driver in the memory chip market's history."

Institution CFRA predicts that HBM may account for over 20% of Micron Technology's DRAM revenue in the 2025 fiscal year, currently only in the single-digit percentage range. As Micron Technology's revenue mix shifts towards higher-value products, it is expected to significantly increase gross margins. For example, the gross margin at the end of the 2025 fiscal year is expected to exceed 50%, doubling from the 20% at the end of the fiscal quarter in February this year.

Brokerages Wolfe Research and Raymond James both rated it as "outperforming the market," with target prices raised to $200 and $160 respectively, based on optimistic outlooks for HBM demand driving up traditional DRAM prices. Micron Technology may achieve earnings per share of $20 based on this, with the memory industry maintaining tight supply this year, and DRAM and NAND prices may see consecutive double-digit percentage increases