Micron began getting credit for its AI upside as the memory cycle turned up.
Shares of Micron Technology (MU 2.55%) rallied 54.1% in the first half of 2024, according to data from S&P Global Market Intelligence.
The memory chipmaker, which is the only U.S.-based producer of DRAM memory chips and one of two U.S.-based producers of NAND flash memory, rallied on optimism for AI-fueled growth.
Most importantly, Micron began ramping up production of its third-generation high-bandwidth memory (HBM3E) during the first half, as memory prices began rising across the board.
AI is not only growing the memory market, but tightening it
After the worst memory downturn perhaps in history in 2022 and early 2023, Micron and its two large Korean competitors, Samsung and SK Hynix, all announced deep capital expenditure cuts and even production cuts at existing fabs. Memory is sort of like a a commodity, or the oil of the tech world, and to have these three large companies act in concert is sort of like OPEC+ cutting back on oil production.
In addition to the cutbacks, the emergence of high-bandwidth memory for AI applications also had a doubly bullish effect on the memory market. Because HBM takes more equipment and time to produce than traditional memory, all three memory-makers were able to repurpose equipment from traditional memory lines to new HBM memory lines, which were in higher demand. That simultaneously allowed for HBM growth, while lowering the industry capacity for traditional memory.
The result is that coming out of the industry downturn, 2024 has seen growth and profitability return with a vengeance, with DRAM and NAND prices rising in concert. In its March earnings report, Micron recorded 57.7% revenue growth, with adjusted (non-GAAP) earnings per share flipping from negative territory to positive territory for the first time since Micron’s fiscal fourth quarter of 2022, which ended in late August 2022.
Micron’s earnings beat and upbeat guidance on the call added another leg of upside to the stock in March 2024, and the momentum continued as other AI-related stocks posted torrid growth. Wall Street analysts in general continued to raise their price targets on Micron stock throughout the first half.
Image source: Getty Images.
Moreover, Micron had a lot of positive announcements on the technology front in the first half as well. In February, Micron announced it was in mass production of its HBM3E memory for AI. Micron had actually fallen behind SK Hynix in HBM, but its 3E product has specs that are unmatched in the market. Micron expects to eventually gain equal or greater share of the AI HBM market than Micron’s overall DRAM market share.
Then in April, Micron announced it had been granted $6.1 billion by the U.S. government as part of the CHIPS Act, for investment in new memory fabs in both Idaho and New York.
These two were highlights amid a slew of more technology announcements, including Micron’s industry-first production of high-capacity 32GB DRAM chips, and 232-layer QLC NAND for enterprise solid state drives.
Micron: Room to run, or topping out?
With high expectations built in and the stock having appreciated some 80% prior to its June earnings, Micron sold off after its June 26 Q3 2024 earnings release. While the results posted a beat, with revenue up a whopping 81.5% and adjusted EPS of $0.62 beating expectations, investors decided to take profits due to inflated expectations.
Micron’s stock is hard to value, which is why it’s subject to wild swings up and down. Looking at the stock on a price-to-book basis, Micron now trades near its highest valuation of the past 20 years.
MU Price to Book Value data by YCharts
While that provides reason for caution, the memory industry is concentrated more than it ever has been in the past, which should enforce supply discipline. Second, AI has the potential to accelerate memory growth across all segments. And third, Micron has a technology leadership position relative to competitors it has never had before.
Therefore, investors should probably hold Micron stock, but perhaps wait for the next pullback to add or buy new shares.
