Micron Technology Inc. (NASDAQ:MU) will release its latest earnings report on Wednesday after the bell. Investors will be looking beyond this release at the company’s market share potential in a coming HBM boom.
Micron’s new HBM technology could be a big earner
Key to the company’s earnings outlook could be further comments on its new High Bandwidth Memory [HBM] product. Micron announced in July that it had created the fastest and highest-capacity HBM in the industry.
With a 2.5 times performance improvement over previous models, Micron’s HBM3 Gen2 also sets records for artificial intelligence [AI] data center performance metrics in capacity and power efficiency. The improvements brought by the chipmaker will reduce the training times of large language models like GPT-4 and improve cost-efficiency.
With large language models (LLMs) growing faster than the available memory, this need for additional memory bandwidth is seen as a bottleneck for generative AI progress and Micron is now well-placed to take full advantage.
The current market leaders for HBM technology are both based in South Korea with Samsung and SK Hynix having a 50/50 split of the market, according to Pat Srinivas, at Buffalo International Fund.
“Micron is not playing at all” in the current HBM3 market, Srinivas said. However, the company now expects to start rolling out its new technology in early 2024.
CEO Sanjay Mehrotra said on the company’s June 28 analyst call that he is expecting “meaningful revenues” from HBM3 in fiscal 2024, which already began this month. Mehrotra added that Micron customers had begun sampling the new HBM3 product with strong feedback.
The company’s Chief Business Officer Sumit Sadana added on the call that the new generation HBM3 chips are “head and shoulders above current HBM3 products in the market in terms of performance, bandwidth, power consumption.”
There were also comments regarding a potential tie-up with Nvidia to create a low-power memory product for its GH200 chips. So Micron could become every bit as indispensable in the coming AI boom as its chipmaking rival.
What does it mean for the company’s bottom line?
A report by TrendForce said that HBM3 chips will dominate the market in 2024. Micron’s decision to skip the HBM3 and deliver its HBM3e in early 2024 could see the company gaining early market share in 2024.
The cost of Nvidia’s H100 flagship GPU is said to be $30,000 with 80GB of HBM capacity, with memory coming in at around 4-5% of that cost. Pat Srinivas said that even with 25% of the HBM market, Micron may only see 10% additional revenue to its current $20 billion estimate for 2023.
Micron could use a revenue boost after it has seen its earnings suffer from a downturn in memory costs. That could be coming to an end with the company reporting a small quarter-over-quarter revenue gain for its third quarter with improved guidance for the fourth quarter.
Inventory has stabilized, demand for chips is improving, while Micron’s largest competitors have been seen cutting supply levels.
Seeking Alpha also reported that Barclays analysts were positive on a rebound for the company in China.
“Positive commentary on both the pricing and demand environment surprised us over the past several weeks after our Asia checks had indicated that the impact of the CAC (Cyberspace Administration of China) ban would exceed the LDD% highlighted by the company,” analysts said.
“We admittedly are a bit surprised by how quickly Micron was able to offset the ban without a material pricing impact,” they added.
“We raise our outlook for both bits and pricing and move slightly ahead of the Street for November and raise CY24. We acknowledge that this is the first print in some time with any expectation for better numbers vs. ‘how bad this could be’ but think numbers move higher and the stock works nonetheless”.
Micron’s CEO said of the company’s third-quarter results:
“We believe that the memory industry has passed its trough in revenue, and we expect margins to improve as the industry supply-demand balance is gradually restored. The recent Cyberspace Administration of China (“CAC”) decision is a significant headwind that is impacting our outlook and slowing our recovery.”
Gross margins slumped to 9% this year from a 5-year company average of around 39%.
Micron’s valuation metrics could be the driver
The key to my buy recommendation for Micron is in its current valuation. If the company does not see a big revenue upside from its HBM3 product then it is still more fairly valued than its peers. Nvidia (NVDA) is currently priced at 31x sales, while AMD (AMD) is priced at 7x sales.
Micron trails both of these with a 4x sales valuation, so there is significant upside potential if the company can make strides in the HBM market.
Downside risks to the thesis
The downside risk to the investment idea is the competition. Samsung and SK Hynix may be able to respond quickly to Micron’s arrival and could certainly hold onto their customers in Asia as the chip sector after the protectionist efforts by China and the U.S.
That could limit the market share potential for Micron and maybe the company will see a three-way market share split as the best outcome for its new product. Investors also have to rely on the valuation upside and that is not a given.
Conclusion
Micron has suffered a downturn due to lower pricing for its memory products, but the company has been able to navigate it, while management sees the potential for a trough in the market. Micron earnings have disappointed analysts over previous quarters but the issue with margins could lead to a surprise in coming quarters. There is also the new market entry for its high-performance HBM3 product that could take some market share from the two market leaders. These developments could lead to a more favorable valuation in Micron, to bring the company more in line with the AI GPU leaders. Micron currently trades at a 43% discount from its all-time high and that could be a target for 2024.
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