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Shares of Micron Technology (MU) took a sharp dive, falling more than 17% in pre-market trading after the company released its results for the first quarter of fiscal 2025. Despite posting revenue that was in line with Wall Street’s expectations and surpassing analysts’ earnings forecasts, the company's guidance for Q2 didn’t sit well with the investors, leading to a significant drop in its stock.
Micron, a key player in high-performance memory and storage chips with applications in artificial intelligence (AI), is seeing strong demand for its data center DRAM products and high-bandwidth memory (HBM) chips. These areas are driving positive momentum for the company.
However, consumer-facing products, especially in the computer and smartphone markets, create significant headwinds. The company is grappling with a supply glut in these markets, which is weighing on its financial performance and future outlook.
During its previous quarter’s conference call, Micron’s management had already warned investors that Q2 might face challenges due to typical seasonal slowdowns and ongoing inventory issues. However, the market's reaction to the company’s Q2 projections suggests deeper concerns about the magnitude of these issues.
Micron now expects adjusted earnings per share to range between $1.33 and $1.53, with revenue projected between $7.7 billion and $8.1 billion. Analysts had expected adjusted earnings of $1.91 per share and revenue of $8.9 8billion for Q2, creating a noticeable gap between the Street’s expectations and management’s guidance.
While Micron grapples with short-term headwinds, is the pullback in its stock a buying opportunity? The stock could rebound due to the strength in the data center and AI-driven markets. Let’s dig deeper.
Consumer Products Pose Short-Term Challenges
Micron lowered its growth expectations for NAND bit demand in 2024 and 2025. This reflects a slowdown in the growth of NAND content in consumer devices, continued inventory adjustments, and a temporary dip in data center SSD purchases after a period of rapid expansion. These factors are likely to impact Micron’s financial performance in the near term.
The industry-wide slowdown in NAND demand growth pushes Micron to adjust its supply chain to maintain balance. Micron has scaled back its NAND capital expenditures, slowed its pace of technology node transitions, and reduced NAND wafer starts by mid-teens percentages. These measures will help align supply with current demand.
On the positive side, Micron remains optimistic about its long-term prospects in the data center sector. The company expects high-capacity NAND SSDs to replace traditional hard disk drives (HDDs) in data centers over the next few years, creating a strong growth trajectory for NAND demand in the long run.
Auto and Industrial Markets Remain Weak
The automotive market has presented additional challenges for Micron. Lower-than-expected automotive production and a shift to electric vehicles (EVs) have slowed the growth of memory and storage content. This, coupled with inventory adjustments by original equipment manufacturers (OEMs), could lead to weaker demand in this segment in the near term.
That said, the long-term prospects in the automotive space look bright, particularly with the rise of advanced driver-assistance systems (ADASs), infotainment, and AI technologies. These advancements will likely drive increased memory and storage content in vehicles over time.
In the industrial market, Micron anticipates a recovery in 2025 after a period of inventory adjustments that have impacted demand.
Data Center Growth: A Key Driver for Micron
Micron has upgraded its forecast for server unit growth, now expecting a low-teens percentage increase in 2024. This growth will be fueled by strong demand for AI-driven servers as well as a solid traditional server refresh cycle. Micron also achieved record data center revenue in its fiscal Q1, with its high-capacity DRAM products seeing robust demand. This positions the company well for continued growth in the data center sector, with the potential for billions of dollars in revenue in fiscal 2025.
Micron has also made significant strides in its high bandwidth memory (HBM) business. In fiscal Q1, it more than doubled its HBM revenue and exceeded its targets, driven by solid execution on yield and capacity ramp-ups. The company now expects the HBM market to exceed $30 billion by 2025 and aims to capture a notable share.
The Bottom Line for Micron Stock
Micron faces short-term headwinds, particularly in its consumer, automotive, and industrial sectors, but its long-term growth prospects remain solid. The company is well-positioned to benefit from the accelerating demand for AI servers, the upcoming AI-driven PC refresh cycle, and an expected increase in memory and storage needs within vehicles. These trends are expected to drive significant revenue growth for Micron in the coming years.
Although Micron’s Q2 forecast came in below expectations, which may prompt some analysts to adjust their price targets, the overall sentiment on Wall Street remains positive. With a “Strong Buy” consensus rating, analysts are confident that Micron will weather the current challenges and capitalize on the rising demand for memory and storage solutions. For investors, this suggests that despite short-term hurdles, Micron’s long-term growth trajectory looks promising.
