Micron Earnings: Management Guides for a Cyclical Recovery and We Maintain Our Forecast

We maintain our $70 fair value estimate for shares of no-moat Micron Technology MU after the firm’s fiscal fourth-quarter results and fiscal first-quarter guidance exceeded our expectations. We maintain our model for fiscal 2024 and longer term but now see an earlier and less back-end-weighted recovery through fiscal 2024. Micron management believes recoveries for the DRAM and NAND markets are underway. While we’ve seen bit shipments for both technologies improve from February-quarter bottoms, management believes pricing has bottomed in the August quarter and is set to rebound. In our view, a cyclical recovery for memory chips should be bolstered by the emerging high spending toward artificial intelligence-focused data centers, which offer a content uplift to suppliers like Micron. We see shares as fairly valued and view a modest selloff afterhours as myopic considering a fiscal first-quarter outlook that while weak, represents a meaningful improvement.

Fiscal fourth-quarter sales rose 7% sequentially with DRAM and NAND sales growing. Year-over-year comparisons continue to be dismal for sales as fiscal 2023 experienced a significant cyclical downturn, but we view sequential recovery as positive. In terms of volume, both DRAM and NAND businesses recorded all-time record shipments for Micron, which is good and is helping to offset weak pricing. Management believes pricing in both markets bottomed in the quarter and is set to improve through fiscal 2024.

Margins in the quarter were poor, but we focused on the improvement sequentially. Non-GAAP gross margin of negative 9% was up 700 basis points sequentially as volumes improved. Management guided to another negative gross margin quarter in November, but we expect it to be the last one as pricing increases in NAND and DRAM drive Micron back to profitability.

Micron’s fiscal first-quarter outlook exceeded our prior model with a midpoint of sales at $4.4 billion implying 8% year-over-year growth and 10% sequential growth.