Following a disappointing Q3 earnings report in late June, Micron (MU, Financial) faced sky-high expectations and a declining stock price. However, after the close last night, MU revealed that robust AI server demand fueled an impressive beat-and-raise Q4 performance. This not only boosted MU shares but also strengthened the entire semiconductor space.
After the Q3 earnings report, the main narrative was that while MU's AI-based growth prospects were solid, its exposure to the sluggish PC and smartphone markets would hold it back. Elevated inventory levels, especially within MU's PC customer base, put downward pressure on DRAM volumes. Additionally, soft consumer spending trends weighed on the smartphone market.
Although partly correct, this narrative failed to grasp the strength of MU's AI business, as shown by the following data points:
- The company's mix of data center revenue reached a record level in 2024. MU expects the total addressable market (TAM) for its high-bandwidth memory (HBM) chips to grow to over $25 billion in 2025, up from $4 billion this year.
- CEO Sanjay Mehrotra reiterated that HBM chips are sold out for 2024 and 2025. MU is increasing its output capacity with a new fab in Idaho, expected to be operational in 2025, and is working through the permitting process for another facility in New York.
- In addition to HBM, MU's data center portfolio includes high-capacity D5 and LP5 products, and SSD solutions. MU expects each of these product categories to generate multiple billions in revenue in FY25.
- MU's 1Q25 revenue guidance of $8.50-$8.90 billion easily beat expectations, with the midpoint equating to year-over-year growth of 85%.
The cherry on top is that MU anticipates PC unit growth to accelerate in the second half of CY25 as the PC replacement cycle gains steam with the launch of new AI PCs and the Windows 12 operating system. This should lead to healthier inventory levels at PC manufacturers, providing another catalyst for DRAM volumes and pricing. Overall, MU's beat-and-raise report reestablishes the company as a leading AI play.
