Micron Earnings Focus on AI Demand, Production

Demand for AI is expected to continue driving Micron's bottom line, but the run-up in stock price following last quarter's earnings sets a high bar for satisfying investors.

To More Dizzying Heights?

Micron has experienced strong growth this year, up over 66%, though it has pulled back from its all-time high reached after Nvidia's earnings last week. Most of Micron's gains followed reporting earnings that far exceeded consensus estimates. Analysts had forecasted a loss of $0.26 per share, but Micron achieved a profit of $0.42 instead. This will be a challenging number to beat as analysts have substantially increased their forecasts since then.

Micron is projected to report earnings of $0.50 per share for its fiscal third quarter, which is higher sequentially but 135% above the prior year's figure. Revenue is also anticipated to experience a tremendous 78.6% year-over-year growth to $6.7 billion. Most of the gains are expected from DRAM sales heavily utilised in AI applications, accounting for 71% of the company's revenue.

Analysts have raised earnings guidance and price targets ahead of the earnings release, reducing the potential for upside surprises. Given Micron's significant share price appreciation, questions remain about whether earnings potential has already been factored into the stock price.

Production Capacity Limitations

As the third largest DRAM producer by market share, Micron has seen demand skyrocket as AI consumes available memory. To increase output, Micron is working to operationalise its new $15 billion semiconductor factory in Idaho. However, a disconnect exists between sales and earnings growth currently as the company benefits from constrained supply, allowing premium pricing on memory chips. However, earnings could see a readjustment once supply and demand in this component rebalance.

Apparently, investors and analysts believe this rebalancing point will remain in the future, and their earnings outlook exceeds Micron's guidance. However, the third quarter is typically when companies revise guidance for the final three months of the fiscal year. Thus, an earnings forecast increase from Micron could positively impact the stock. Market reaction will likely depend on the CEO's comments about the sustainability of AI demand.

Micron in Correction Phase

Micron has retreated from its all-time peak of $160 after surpassing the $155 projection of its cup-and-handle pattern and may continue its decline while trading below both resistances. Should bulls fail to defend support at $130 and then $120, the likelihood of a slide towards $100 will increase. Conversely, a move back above $155 could pave the way to $170 and subsequent round resistances.

Source: SpreadEx / Micron Technology

Key Takeaways

Micron is expected to report strong earnings growth in the current quarter, which is driven by the continued high demand for memory from AI utilisation. However, with analysts raising forecasts and the stock price up over 66% year-to-date, Micron faces a high bar to meet investor expectations. Market reaction will depend on comments about sustainable growth in the AI memory market and Micron's sales-earnings gap.