Micron Technology's (MU.US) share price has continued to experience significant volatility in recent weeks. Just before the eagerly anticipated earnings release, the stock surged to an all-time high, only to fall sharply in the following days. Various negative factors are converging simultaneously, causing this pullback, but the market's reaction may be exaggerated. The stock is expected to return to an upward trajectory soon.
During this market movement, many have claimed that the cyclical era of the memory industry is over, suggesting that structural demand from artificial intelligence (AI) will support the sector and that "this time is different." Some have even labeled Micron Technology as "the next Nvidia." However, despite explosive revenue and profit growth for Micron, SK Hynix, and Samsung Electronics, the memory industry remains as cyclical as ever. The reason is simple: the industry is cyclical because the end markets it serves are cyclical. Smartphones, personal computers (PCs), and processors fall into this category.
These products were not initially cyclical either. When they first entered the market, the demand ceiling seemed unimaginably high. Subsequently, competitors entered, technology became commoditized, and before anyone realized it, oversupply emerged, causing prices to plummet. Therefore, believing AI will not become cyclical is a short-sighted view. AI has not yet shown cyclicality simply because it hasn't existed long enough to experience a downturn. This does not mean a cycle won't occur in the future. This distinction is crucial, as many investors are currently buying Micron Technology hoping to capture "the next Nvidia," without realizing that, as history has repeatedly shown, the stock remains at significant risk of a sharp decline due to demand shocks.
Memory production involves extremely high fixed costs, and capacity expansion typically requires years of planning and construction. This means Micron and its Korean peers are far from being agile companies. Consequently, the key to investing in Micron is not debating whether memory manufacturing is still cyclical, but rather judging when the current upcycle will transition into a downcycle.
In this context, Micron's latest earnings report is critical. The Q2 fiscal report showed that while HBM revenue (recorded in the Cloud segment) grew substantially and helped drive the gross margin to 74%, the quarter-over-quarter increase was "only" about 800 basis points. Examining the company's other business segments reveals that gross margin improvements were more pronounced in non-AI markets. The core Data Center business (OEM data center customers) achieved a 74% gross margin, matching the AI sales margin, while the Mobile and Client (consumer business) margin was even 500 basis points higher. The Automotive and Embedded business also showed significant improvement.
Thus, although HBM is driving shortages, from a volume perspective, rising DRAM and NAND prices are providing greater benefits to Micron's non-AI businesses. This is logical: HBM customers already pay premium prices, so price changes are smaller; whereas products like DDR4, which have extremely low production costs, can now be sold at very high prices.
To capture some of this excess demand, Micron and the Korean memory makers are increasing capital expenditures. Micron committed to $5 billion in capex during Q2 while still generating nearly $7 billion in adjusted free cash flow. However, despite intensifying shortages, the "big three" are maintaining a slow pace of capacity expansion. Decades of industry boom-and-bust cycles have taught them that the best strategy is to increase supply gradually and cautiously, even when demand is feverish.
This wait-and-see approach should allow the memory industry to balance supply and demand without triggering a price collapse, thereby avoiding a premature return to a trough. Simultaneously, it will enable them to generate staggering profits. Micron provided the following guidance: Q3 revenue midpoint of $33.5 billion (up 260% year-over-year / up 40% sequentially), a gross margin of approximately 81%, and a non-GAAP EPS midpoint of $19.15 (up 57% sequentially). Providing such forecasts immediately after a historic quarter indicates the severity of the shortage and demonstrates that demand remains very strong despite price increases. An 81% gross margin even surpasses Nvidia's! It's hard to imagine that just a few years ago (2023), Micron reported negative gross margins for three consecutive quarters.
This earnings report essentially covers the bullish thesis for Micron. At the current run rate, the company could earn approximately $60 per share over the next four quarters. By the way, this implies a forward P/E ratio of only about 6 times. However, despite these results, investors chose to "sell the news." On the first trading day after the earnings release, Micron's stock fell over 8%, as profit-taking overshadowed the operational performance. Subsequently, selling intensified with the outbreak of conflict in the Middle East, the closure of the Strait of Hormuz, a spike in oil prices, and a rotation into defensive stocks. The broader market entered a de-risking mode, selling high-beta stocks in favor of safer assets, putting additional selling pressure on Micron.
Beyond macro pressures, some negative news emerged over the past week or so, primarily related to Google's (GOOGL.US) new quantization algorithm, TurboQuant. The algorithm claims to improve the speed of key-value ("KV") caching in AI processors by several orders of magnitude. Currently, the vast majority of memory in AI processors is used for two purposes: 1) KV caching, and 2) model weights. The logic follows that if KV cache efficiency improves, chipmakers will require less memory to meet customer needs. Influenced by this, DRAM prices fell over 5% this week as the market began speculating on the potential implications for future demand—though ongoing Middle East tensions and inflation concerns likely also contributed to the decline.
So, will this memory performance improvement reduce overall bit demand and harm Micron's growth prospects? To answer this, one can look at real-world cases. A classic example is the origin of the so-called "Jevons Paradox." In the late 19th century, the famous Scottish inventor James Watt developed a highly efficient steam engine that drastically reduced the amount of coal needed per unit of energy output. The prevailing view at the time was that coal consumption would decline as efficiency increased. However, the opposite occurred—coal became cheaper and more accessible, which, in the long run, drove overall demand growth. This concept is known as induced demand, essentially meaning that when the cost of a resource decreases, its consumption increases.
With hyperscale cloud providers already committed to hundreds of billions of dollars in AI capital expenditure, memory demand is certain to remain high for years to come. Cheaper memory won't make them content with existing plans—instead, it will further stimulate demand as they race to win the AI arms race. Therefore, TurboQuant is not a negative catalyst for Micron. In the future, this moment might even be looked back upon as a "democratizing moment" for memory, allowing players beyond the large tech companies that currently dominate HBM shipments to enter the market.
In summary, as the current upcycle continues and even accelerates, Micron Technology is expected to continue outperforming the market in the short to medium term. Over the next few quarters, capacity expansion will gradually increase revenue and net profit, even if extremely high prices moderate and lower utilization at new fabs causes gross margins to retreat from the projected 80%-plus level next quarter. In the long term, Micron is expected to eventually fall victim to the next downcycle, as AI will ultimately become cyclical like all major long-term tech trends before it. This inflection point is not imminent, but holding the stock requires remaining highly vigilant for the next shock. For now, however, Micron remains attractive at current price levels, and the stock price is expected to continue rising as strong operational performance persists and Middle East tensions ease.
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