Summary of Key Highlights
Micron's third-quarter financial report for fiscal year 26 (ending May) showed outstanding performance: revenue reached $41.5 billion, a 74% increase from the previous quarter, far exceeding expectations. This was mainly due to the soaring prices of memory chips (DRAM up by over 60%, NAND by 85%), resulting in a gross margin of 84.6%. The company's short-term outlook is very optimistic, with long-term supply and demand tensions expected to persist until after 2027. Micron has signed 16 strategic long-term contracts (including "take or pay" clauses) to secure future revenue and has received a deposit of $22 billion from customers. However, capacity expansion is hindered by physical constraints, such as the slow construction of cleanrooms, which limits the ability to rapidly increase production. The company aims to break its fate as a cyclical stock through these long-term agreements, and the market may offer a premium valuation, shifting its classification from a cyclical to a growth stock.
1. Exceptional Performance: Prices Soar, Profitability Remains High Despite Limited Volume Growth
Micron's revenue surge this quarter was not due to increased sales volume but rather higher prices:
- Volume Trends: DRAM shipments only increased by a single-digit percentage, and NAND by just over half a percent.
- Price Movements: DRAM prices rose by more than 60%, with NAND experiencing even greater increases (85%) due to strong demand, especially from AI data centers, which outpaced production capacity.
- High Gross Margin: The additional revenue from price hikes was almost entirely profit (marginal costs were close to zero), with a conversion rate of over 98% into gross margin—a figure that even NVIDIA would envy.
By segment, revenue from AI data centers increased by 103% (to $11.5 billion), closing in on traditional cloud storage ($13.8 billion). Revenue from mobile and PC storage also rose by nearly 50%, but this is bad news for downstream manufacturers as it raises their cost pressures and squeezes their own profit margins.
2. Long-Term Contracts as a Stability Factor: Securing Revenue and Breaking the Cycle
Micron signed 16 strategic long-term contracts this quarter (only one in the previous quarter), a crucial shift in its business model:
- Customers and Contract Terms: The contracts cover data centers, consumer electronics, and automotive sectors (including four major customers, three medium-sized customers, and several smaller ones), with most agreements lasting five years (up to 2030) and one for three years in the automotive industry.
- Key Clauses: Customers must either pick up the goods or pay; any breach is considered a serious violation. Price ranges are set, with the upper limit based on current market prices and the lower limit applying throughout the contract period.
- Financial Benefits: Four major contracts guarantee annual revenue of $20 billion for five years, and Micron has received a deposit of $22 billion in case of breaches. These agreements convert more than half of its revenue into stable income, reducing the volatility typical of cyclical stocks (where profits are used for expansion followed by losses during oversupply).
Why would customers sign these contracts? It's due to Micron's "Made in the USA" label; although Samsung and SK Hynix may have stronger production capabilities, Micron is a U.S.-based company, meeting customers' concerns about supply chain security.
3. Capacity Expansion Challenges: Physical Barriers Limit Growth
There are concerns that Micron will expand aggressively with its profits, leading to oversupply in the future. However, this time it's different:
- Physical Constraints: Building cleanrooms for memory chip production takes 2.5 to 4 years, and renovations take 1.5 to 2.5 years; money alone cannot accelerate this process.
- Capital Allocation: Micron plans $10 billion in capital expenditures next quarter (an increase from current levels), with more than half going towards cleanroom construction. It has also signed a long-term contract with ASML for EUV (extreme ultraviolet) lithography machines to adopt more advanced manufacturing processes.
This means that production capacity will not increase significantly in the short term, and supply-demand tensions are likely to persist, keeping prices stable.
4. Could Micron Become a Growth Stock? Valuation May Rise
Memory stocks were traditionally cyclical, with high profits during boom times followed by losses during downturns, resulting in low P/E multiples at peak performance due to fear of market reversals. Micron aims to change this:
- Revenue Stability: Half of its revenue is secured through long-term contracts, reducing volatility.
- Slow Expansion: Tight supply and demand will maintain stable profits.
- Valuation Potential: Currently, Micron's P/E ratio is only 10 times. If the market recognizes it as a stable growth stock, its valuation could rise to 12-15 times based on its strong performance.
Dolphin Jun notes that while there were wild predictions about lithium mining stocks as growth candidates, the demand for memory driven by AI is non-linear and deserves serious consideration; this situation may indeed be different.
5. Impact on Upstream and Downstream Players: ASML Benefits, While Mobile Manufacturers Suffer
Micron's performance affects both its suppliers and customers:
- Suppliers: ASML will see increased demand for its advanced lithography machines due to Micron's contracts.
- Downstream Manufacturers: Mobile and PC manufacturers face higher costs due to rising memory prices, squeezing their profit margins.
- AI Infrastructure: Memory has become a critical component in AI development; the rise in AI (especially autonomous systems) drives increased demand for storage, benefiting related industries.
In Conclusion: Micron's financial report not only confirms that the memory industry is in a strong cycle but also demonstrates its effort to break the cyclical nature of the sector. If it can continue to secure more long-term contracts and limit capacity expansion, it could transform from a cyclical stock into a stable growth stock, with potential for higher valuations. For investors, this signals a shift in the memory industry from a cyclical to a growth-oriented narrative.