Shares of Micron (MU) are trading higher on Thursday after the company reported better-than-expected second quarter earnings. Revenue for the quarter came in at $5.82 billion, beating analyst estimates of $5.35 billion. Adjusted earnings per share (EPS) also stood at $0.42, beating the expected $0.24 per share. To offer his perspective on this impressive performance, TD Cowen Managing Director Krish Sankar joins Yahoo Finance Live.
Sankar highlights the company "blasted past" all analyst expectations. He highlights that the surging demand for high bandwidth memory, an area where Micron is beginning to gain traction, positively impacted the company's overall outlook for the next few years. Following a downturn in the memory market, Sankar says Micron's products and facilities have become increasingly utilized, creating "a margin expansion story."
Sankar remains optimistic about pricing at Micron in the coming years, as the company's products are being utilized in applications such as iPhones and PCs, sustaining demand and driving growth.
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Editor's note: This article was written by Angel Smith
Video Transcript
- The memory chip company also impressing Wall Street with its third quarter guidance. And so for more on what's ahead for the company and the stellar results, let's get to Cowen managing director and senior research analyst Krish Sankar.
Krish, great to have you here with us. You were one of the analysts that came out and said, hey, pretty good quarter. I'm going to raise my price target here. What-- and take us into your thesis here. What really stuck out to you on this company's earnings results?
- Yeah, sure, Brad Thanks for having me. A couple of things I would say. Number one is obviously a beaten race was expected, but they literally blasted past those numbers. So even the most bullish expectations, they exceeded those numbers' estimates.
Second thing is obviously there's a huge demand for high bandwidth memory, which is a type of DRAM, and that demand is largely driven by AI applications. And Micron literally had 0% share last year, and they're gaining traction in it. And that's a positive for the stock and the overall outlook over the next few years.
And I think the third and more impressive thing was the fact that last year was a cyclical down year for memory, and DRAM and NAND price bottomed, I would say, about six months ago.
They've been on an upswing, and as the pricing continues to improve and their factories start getting better utilized, they get this amazing margin expansion story. So pricing is good. Helps the revenue. Pricing plus utilization helps the gross margins. That's where you saw earnings power.
The Street was expecting May quarter to have $0.09 in EPS. We were one of the highest on the street at $0.25. They came and guided $0.45.
- Krish, what about inventory levels? Because that's been one of the issues with the stock for many on the street. What does that look like? And when you look out over the next couple of quarters, how are you assessing that risk?
- Yeah, sure, Seana. I think the inventory levels have kind of come down quite a bit. Last year you had that issue where inventory was pretty high at the customers and also at the suppliers like Micron. So they did have some inventory writedown at Micron.
But then the customers started using up their inventory. So I would probably say that on the AI server side, obviously, AI server is growing. There's not any much inventory issue.
With the regular servers, the non-AI servers, a lot of the inventories are of the older DDR4 DRAM chips. And going forward, everyone is going to buy DDR5, which is a more-- later, greater version of the DRAM chip.
And then, obviously, on the industrial side, it's close to getting normal, but it should probably normalize pretty soon. So largely speaking, I think inventory levels will come back to normal. I think over the next few quarters or into next year, you're going to see inventory levels probably start moving higher as people start building inventory for surging demand environment.
- On pricing, Krish, how are you looking out for the next not just year, but for the next two years, potentially, here. When you have the company talking about expectations that DRAM and NAND pricing levels are going to increase further throughout calendar year 2024 and then in through fiscal year 2025 as well, giving them some much improved profitability, how does that factor into your long-term outlook?
- Yeah sure, I think the pricing is kind of interesting. Pricing is really robust for high bandwidth memory, which goes for AI servers. On the DDR5, which is the non-AI server applications, I think pricing has been pretty good. A lot of the investments really are in high bandwidth memory, so later into the year you will probably see DDR5 pricing actually get better because there, the demand drivers are smartphones, PCs, and non-AI servers.
And smartphones and PCs have bottomed, but they haven't quite recovered yet. They should probably start recovering into the back half of this year and into next year.
So I would say into the next six to nine to 12 months, the pricing looks very optimistic. If you ask me, well, how to think about pricing in the back half of calendar '25 into 2026, I would say at this time it's anybody's guess. It's very hard to forecast that far out. But at this point, momentum is definitely in your favor, and because HBM is being driven by AI applications, and there's tremendous demand for that.
And HBM die size but the chip size is almost three times bigger than a regular DRAM. It also helps absorb underutilization and helps with the pricing too.
- Krish, when you take a look at these numbers and the surge in demand that we have seen, should Micron-- is Micron being viewed right now as one of the biggest beneficiaries that we are seeing from this boost in AI spending?
- Yes, for sure. If you look at the AI chips, for example, like NVIDIA introduced-- something called H100 and H200. And then recently, they introduced the black code chip-- say D100. And every AI chip goes with a high bandwidth memory chip attached to it, and the H100 and H200, the memory attach rate went higher, and now H200 to the Blackwell, it's almost another 30%, 33% higher.
So that basically says that for every NVIDIA GPU you are selling, there is more memory content attached to it. So that obviously is a benefit for memory companies. And then eventually, if there is more demand for AI servers and AI penetrates more to the world, it's going to be good for the memory companies, and obviously Micron is a good beneficiary.
The other two players have been-- SK Hynix is very strong in HBM, and then Samsung is slowly coming up there.
- And we certainly saw the reaction in Samsung stock earlier this week. All right, Krish, always great to talk to you. Thanks so much for joining us here on Yahoo Finance this morning.
