Micron: Big ups and downs, the ballast still needs to look at the cycle

Micron (MU.O) released its fourth-quarter financial report for the fiscal year 2024 after the U.S. stock market closed on September 29, 2024 Beijing time, with the following highlights:

1. Overall Performance: Revenue & Gross Margin, Rebound as Expected. Micron's total revenue in the fourth quarter of fiscal year 2024 was $7.75 billion, a year-on-year increase of 93.3%, exceeding market expectations ($7.66 billion). Revenue continued to accelerate in this quarter, driven by growth in both the company's DRAM and NAND segments. Micron achieved a net profit of $887 million in the fourth quarter of fiscal year 2024, with a significant improvement in profit margins as well. Price increases and a recovery from the bottom of the cycle boosted the company's performance.

2. Business Segments: DRAM and NAND, Nearly Doubled Growth. DRAM and NAND accounted for 99% of the company's revenue, and both segments saw nearly doubled growth this quarter. Specifically, the growth of DRAM and NAND this quarter was mainly due to the overall improvement in the storage industry, with different degrees of price increases on the product side.

3. Outlook for the Next Quarter: Operating revenue for the first quarter of fiscal year 2025 is expected to be $8.5-8.9 billion (an 84% year-on-year increase), exceeding market expectations ($8.32 billion); Gross margin (GAAP) for the quarter is expected to be 37.5% to 39.5%, with a continued improvement in gross margin compared to the previous quarter, surpassing market expectations (37%).

Dolphin's Overall View:

Micron's financial performance this quarter exceeded market expectations. The company's revenue and gross margin continued to improve this quarter. Despite a not very significant increase in quarterly shipments, the company's performance is still improving, driven by the continued rise in DRAM and NAND prices. With the core operating profit reaching $1.5 billion this quarter, the company has emerged from the cyclical trough.

However, it is worth noting that storage prices have indeed declined recently, mainly due to the lack of strong demand in downstream markets such as smartphones and PCs. After experiencing inventory replenishment and stocking demand in the supply chain, the rise in storage prices is once again under pressure, which was a concern for some institutions before the financial report.

For Micron, Dolphin believes it can be seen as a combination of "cycle + new perspectives":

①Regarding new perspectives, the focus is mainly on HBM, AIPC, and storage upgrades, which have driven the company's market value to soar to over $170 billion. However, considering the company's communication and industry conditions, even in the next fiscal year, HBM's contribution to the company's revenue is still only about 10%. The terminal market for AIPC has yet to see an explosive demand situation, and the upgrade of storage at the application end is not progressing as quickly. In the short term, it is difficult to show performance, leading to a significant pullback in the company's stock price②Regarding the cycle, the main focus is on terminal markets such as PCs, mobile phones, data centers, etc. Although major downstream markets have shown signs of recovery, the growth is only in single digits. The weak recovery has dampened expectations for an upward cycle in the industry, leading to a lackluster increase in storage prices, especially with recent price declines. The company expects the three major markets to continue to maintain single-digit growth in 2024.

From a supply and demand perspective, the company believes that in 2024 and 2025, there will be double-digit growth in demand for DRAM and NAND, while supply-side capacity will decrease below the peak level of 2022. With a higher proportion of HBM investment, supply and demand balance will eventually be achieved.

Overall, in terms of $Micron Tech(MU.US), the impact of the company's new growing business on performance is relatively small, and it should still be viewed from a cyclical perspective. Although the company's cyclical aspect faces pressure from declining prices, when the company's market value dropped from $170 billion to below $100 billion, the market had actually already digested the expectations the company had previously entered. Viewing the company from the perspective of a cyclical stock, with HBM, AIPC, etc., seen as additional pleasant surprises. Although some mainstream institutions were not optimistic about the company's performance from a performance perspective, Dolphin still added it to the simulated position below $100 billion. Apart from emotions like AI, the value of the company's original cyclical part can provide a safe ballast.

Below is Dolphin's specific analysis of Micron's financial report:

I. Overall Performance:

1.1 Revenue & Gross Margin, Continuously Improving

In the fourth quarter of Micron's fiscal year 2024, total revenue was $7.75 billion, a year-on-year increase of 93.3%, exceeding market expectations ($7.66 billion). Revenue continued to rise this quarter, mainly driven by the growth of the company's core businesses in DRAM and NAND, with the increase in storage prices being the main driver of this growth .

1.2 Gross Margin Situation

In the fourth quarter of Micron's fiscal year 2024, the company achieved a gross profit of $2.737 billion, with the quarterly gross margin continuing to rise.

The company's gross margin for this quarter was 35.3%, with product price increases and a better product mix being the main drivers of the gross margin improvement. Although the company still has a inventory volume of $8.875 billion, with the recovery in sales, the company's storage turnover speed has accelerated, also driving the improvement in the company's gross margin.

1.3 Operating Expenses

In the fourth quarter of fiscal year 2024, Micron Technology's operating expenses were $1.198 billion, a year-on-year increase of 27.7%. The operating expense ratio for this quarter remained stable at 15.5%.

Breaking down the expenses:

1) Selling and Administrative Expenses: In this quarter, it was $295 million, a 34.7% increase year-on-year. The selling and administrative expense ratio was 3.8%, a decrease of 1.7 percentage points year-on-year, mainly due to revenue improvement. There is a certain relationship between sales expenses and revenue performance, while administrative expenses are relatively fixed.

2) Research and Development Expenses: In this quarter, it was $903 million, a 25.6% increase year-on-year. Research and development expenses are the largest source of the company's operating expenses, and the research and development expense ratio for this quarter decreased to 11.7% as the increase in revenue lowered the proportion of research and development expenses. As a technology company, Micron Technology places more emphasis on research and development capabilities, with research and development expenses steadily increasing.

1.4 Net Profit Situation

In the fourth quarter of fiscal year 2024, Micron Technology achieved a net profit of $887 million, slightly lower than market expectations ($950 million), mainly due to the increase in gross margin and storage prices. In this quarter, the company's net profit margin was 11.4%, showing a significant improvement in profitability. The company's operating profit for this quarter reached $1.5 billion, indicating a recovery from the trough.

II. Business Segments: DRAM and NAND, Nearly Doubled Growth

From the previous in-depth analysis of Micron Technology by Dolphin Jun on " Micron Technology: Has the Storage Chip Giant Survived the Winter?", the company's largest source of revenue is storage chips. From the latest financial report, DRAM and NAND remain the company's most important sources of revenue, accounting for a combined 99%. Therefore, the changes in Micron's business are mainly dependent on the performance of the DRAM and NAND businesses.

2.1 DRAM

DRAM is the company's largest source of revenue, accounting for nearly 70%. **In this quarter, the company's DRAM business revenue rebounded to $5.326 billion, a 93.3% year-on-year increase. This was mainly driven by the recovery in DRAM product prices due to industry improvementMicron's DRAM business grew by 14% quarter-on-quarter this quarter, with shipments remaining relatively stable and prices rising by about 15%.

The company expects the total addressable market (TAM) for HBM to exceed $25 billion, with Micron expected to capture over 6% market share, approximately $1.5 billion, accounting for less than 10% of the company's revenue, with a relatively small impact on performance. As shipments and pricing for HBM in 2024 and 2025 have already been locked in, the company's increased capital expenditure is mainly focused on HBM.

Dolphin believes that the DRAM industry has shown signs of recovery this fiscal quarter, with overall product prices seeing a certain increase. Taking DDR4 8G (1G*8) 3200Mbps as an example, the product price has risen from a low of $1.4 in September 2023 to a high of $1.83, gradually falling to $1.72 by the end of September.

2.2 NAND

NAND is the company's second largest source of revenue, accounting for 30%. The company's NAND business revenue for this quarter was $23.65 billion, a 96.3% year-on-year increase. The growth of NAND this quarter has also nearly doubled, driven by both volume and price increases. Data center SSD revenue exceeded $1 billion this quarter, setting a quarterly record. The company's ninth-generation TLC NAND technology SSDs have been officially mass-produced and shipped in large quantities. Micron's NAND business grew by 14.5% quarter-on-quarter this quarter. Both shipments and average prices of NAND this quarter saw high single-digit growth.