Micron Soars After Reporting Blowout Earnings, Boosts Guidance
Step aside Nvidia: as we noted in our preview, with the world's most valuable company going nowhere in recent months, all attention has shifted to Micron, which has rapidly become one of the most important stocks in the world and certainly the most actively traded, surpassing both Nvidia and Tesla in recent days.
As such all eyes were on Micron's earnings today, and even with "sentiment at 11/10", according to UBS, the company still managed to blow away expectations for its Q3 earnings while delivering a sales forecast that topped Wall Street estimates after AI-fueled shortages of the components sent prices soaring.
Here is what it just reported for the just concluded May/Q3 fiscal quarter:
Starting with the bottom line...
- Adjusted EPS $25.11, beating consensus of $20.49.
We then go to the top of the income statement:
- Adjusted Revenue $$41.46BN, smashing all sellside estimates of $$35.69BN, and even well above the most optimistic buyside bogeys.
- Cloud Memory revenue $13.77 billion, beating estimate $10.69 billion
- Core Data Center revenue $11.52 billion, beating estimate $6.8 billion
- Mobile and Client Revenue $11.52 billion vs. $3.26 billion y/y, beating estimate $9.73 billion
- Automotive and Embedded rev. $4.63 billion, beating estimate $3.51 billion
- Adjusted gross margin 84.9% vs. 39% y/y, beating estimate 81.9%
- Adjusted operating income margin 81.2% vs. 26.8% y/y, beating estimate 77.9%
- R&D expenses $1.32 billion, +36% y/y, higher than estimate $1.29 billion
- Adjusted operating expenses $1.52 billion, +34% y/y, beating estimate $1.43 billion
Looking ahead, the company's forecast is just as impressive:
- Micron sees Q4 adjusted Revenue of $49-$51BN, beating estimates of $43.24BN
- Sees adjusted EPS $30 to $32, beating estimate $25.31
- Sees adjusted gross margin about 86%, beating estimate 83.6%
- Sees adjusted operating expenses about $1.65 billion, below estimate $1.66 billion
Commenting on the quarter, the company said that “Micron is investing at record levels in technology, products and supply to address our customers’ rapidly growing demand. We believe our multi-year Strategic Customer Agreements will significantly enhance the durability and predictability of Micron’s strong financial performance.”
More important was the company's discussion of its long-term agreements, i.e. "Strategic Customer Agreement". This is what it said in the accompanying presentation:
- We are pleased to announce that we have completed 16 SCAs with customers across the data center, consumer and auto market segments. These SCAs accelerate the transformation of our business model, enhance partnership in technology and innovation, and provide customers with contracted supply assurance.
- Typically, these agreements have a five-year term, from calendar 2026 through the end of calendar 2030. Automotive agreements generally have a three-year term.
- The 16 signed agreements represent roughly 20% of our DRAM volume and a third of our NAND volume over this period.
- These SCAs include four very large customers and three medium-sized customers.
- The remaining agreements relate to smaller customers from the automotive industry and represent our commitment to this important sector.
- When completed, we expect approximately half or more of our company revenue to be under these SCAs with customers across end markets. Our customers value our U.S. supply plans, and this is reflected in our SCAs.
- These SCAs are structured as take-or-pay agreements, with binding commitments to purchase specific volumes over this multi-year term.
- The largest agreements generally have a ceiling price for existing products at the current CQ2 (calendar Q2) market price, and a floor price through the term of the agreement.
- Several SCAs, which account for a modest portion of the SCA-related revenue, include either fixed prices or have no price bands associated with them where pricing will be subject to market conditions. When all planned SCAs are executed, agreements with either fixed prices or price ceilings at or close to current CQ2 market prices are expected to be approximately 40% of our revenue.
- For SCAs which do contain such price bands, pricing is designed to stay within this floor to ceiling level through the course of the term. This pricing visibility will help our SCA customers across market segments to better manage their business and grow their demand.
- For our SCAs with price bands, the floor price enables a very robust gross margin for Micron, well above our peak quarterly margins in any past cycle.
- 14 of the 16 SCAs that we have signed have a cumulative revenue at minimum price per our contracts of approximately $100 billion over the remaining agreement term.
- They also strengthen our long-term financial performance, margins and free cash flow expectations, with higher visibility and improved stability in our business performance.
- Under the SCAs we have signed so far, we project to receive cash deposits and related financial commitments of $22 billion. This further demonstrates customer commitment to this new business model. Mark will provide additional details.
- Our SCAs with customers across data center to consumer devices to auto and industrial applications create a new paradigm for us to strengthen our customer relationships. They provide committed DRAM, including HBM as appropriate, and NAND supply to our customers over a multi-year time horizon.
- In a period of significant shortage, this supply visibility is extremely beneficial to our customers. This visibility enables our customers to leverage SCA supply to make progress on their strategic plans, drive growth and enable their end consumers to benefit from their products and services. We are very appreciative of our customers, who have worked with us through this period of tight supply with a strong collaborative spirit to create win-win outcomes for the long term for the entire ecosystem and end consumers.
Micron and its peers in the memory space — Samsung Electronics and SK Hynix — have become major beneficiaries of the artificial intelligence boom. A spending spree by data center operators has stoked the appetite for both conventional memory and a newer variety called high-bandwidth memory, or HBM, that works with AI systems.
Micron has struggled to satisfy memory-chip demand, creating shortages in areas like computers, phones and cars. Though the company is expanding its manufacturing capacity, prices are expected to remain high for the foreseeable future.
Micron works with Nvidia to integrate its memory into AI infrastructure. Earlier this month, Nvidia Chief Executive Officer Jensen Huang confirmed that his company will rely on Micron’s HBM4 memory, along with those of its rivals, for its next-generation Vera Rubin platform. All three of the major memory makers have been jockeying for a slice of that business.
Meanwhile, SK Hynix, which currently leads the HBM market, just announced plans for a stock listing in the US. The company is seeking roughly $29 billion in the offering, aiming to further capitalize on memory demand.
In a note published by Goldman's analyst, James Schneider, he write the following post-earnings observations:
- Key stock takeaways: We expect the stock to move higher following a quarter and guidance that were well ahead of the Street, despite elevated investor expectations given continued industry pricing momentum for both DRAM and NAND markets. We expect investors to focus on critical elements of management's commentary on today's conference call, including (1) additional color on the company's 16 Strategic Customer Agreements; (2) potential updates to the company's FY27 CapEx outlook; (3) market color on the conventional DRAM and NAD segments.
- Quarterly results were well above the Street: Micron reported revenue of $41.46 bn, well above GS at $37.58 bn and the Street at $36.28 bn, while gross margin of 84.9% was above GS at 83.4% and the Street at 82.5%. Non-GAAP EPS of $25.11 was also well above GS at $22.07 and the Street at $21.05. DRAM revenue of $31.33 bn was well above GS at $28.30 bn and the Street at $28.21 bn, while NAND revenue of $9.94 bn was also above GS at $9.18 bn and the Street at $7.77 bn.
- FY4Q guidance is well above the Street. Micron guided FY4Q well above the Street on revenue and margins. Revenue was guided to $50.00 bn at the midpoint, which is well above GS at $48.77 bn and the Street at $43.34 bn. Non-GAAP gross margin was guided to 86%, in line with GS at 86.1% and above the Street at 84.6%. Non-GAAP EPS guidance of $30.00 - $32.00 (midpoint of $31.00) was above GS at $29.95 and well above the Street at $25.77.
- Read-through to our coverage: We expect a positive initial reaction for SNDK (Buy) in our coverage given similar end-market exposure.
- Price target and risks: Our 12-month target price of $900 is based on a 18X P/E multiple applied to our normalized EPS estimate of $50.00. Key upside/downside risks include: (1) continued execution on the company's HBM roadmap and share gain vis-a-vis Samsung, (2) sizable step-up (above current expectations) in HBM content for AI accelerators, (3) continued signs of CXMT gaining DRAM market share, negatively impacting pricing dynamics.
In kneejerk response, the stock which slid in the past 2 days, has recovered most of the losses and has surged more than 10% rising to $1136 after briefly dipping below $1000 just before the market closed.
The company's investor presentation is below (pdf link)