Memory giant Micron Technology is set to report its Q3 FY’24 results, with expectations for strong revenue growth driven by higher prices for DRAM chips and increased demand for High Bandwidth Memory used in artificial intelligence applications. Analysts forecast revenue of $6.65 billion, up 64% from last year, and adjusted earnings of $0.50 per share. Memory prices have been rising, with contract prices for DRAM expected to increase by 13% to 18% in the second quarter. Demand is also picking up from the PC market and high-end smartphones, while the deployment of generative AI tools is driving demand for high-performance memory solutions.
The rapid growth in demand for AI and machine learning algorithms is leading to increased need for high-bandwidth memory for training large language models and inferencing quickly. Memory vendors like Micron are seeing strong pricing power in the memory space due to the tight supply environment and weak investments in memory capacity by major manufacturers. Micron’s High Bandwidth Memory capacity for this year has been fully sold, with most of next year’s production capacity already booked. The company also expects higher demand for its high-performance DDR5 memory chips, which could boost price realizations and margins. Micron is guiding for adjusted gross margins of 25% to 28% for the quarter, a significant improvement from the year-ago period.
The surge in interest in AI and the turnaround in the memory market have driven strong gains in Micron’s stock price, with an increase of almost 75% since early 2021. This outperforms the S&P 500’s growth of about 45% over the same period. Companies like Arista Networks, a leader in high-speed networks catering to hyper-scalers and big corporations involved in generative AI, have seen even greater stock price increases. Arista is part of the Trefis High Quality Portfolio, which has outperformed the S&P 500 each year over the past few years. While Micron’s valuation is reasonable at 16x consensus FY’25 earnings, concerns remain about the global economy and the company’s capacity to meet the surge in AI-related demand.
Looking ahead, there are uncertainties surrounding the global economy, high interest rates, and stubborn inflation that could impact consumer electronics sales. Micron’s muted capital spending in recent years raises concerns about whether the company will have enough capacity to meet the growing demand for memory products. Analysts currently have a price estimate for Micron stock that is 20% below the current market price and will be revisiting their assessment following the Q3 results. It remains to be seen whether Micron can continue its strong performance in the face of these challenges and uncertainties.
