Micron Technology (MU) shares soared in early Thursday trading, opening at an all-time high after the memory-chip maker posted a surprise second-quarter profit and said a new and growing portion of its product lineup would see a surge in demand over the coming years.
Micron makes NAND and DRAM chips for the memory market, competing against big Asian-based rivals such as SK Hynix and Samsung. It is transitioning into the broader artificial intelligence technology race with a new semiconductor designed to support generative AI applications.
Late last year, Micron told investors that it began developing a deal with AI-chip leader Nvidia (NVDA) , which will see its high-bandwidth-memory, or HBM, chips embedded in the new H200 semiconductors.
Micron said its HBM improves performance and helps reduce power consumption, a key factor in enabling AI strategies to develop given their massive computing needs.
That's driving a massive surge in demand, Micron said, with sales likely to match its legacy DRAM division as early as 2025.
"Our HBM3E product will be a part of Nvidia's H200 Tensor Core GPUs, and we are making progress on additional platform qualifications with multiple customers," Micron Chief Executive Sanjay Mehrotra told investors on a conference call late Wednesday.
HBM demand surge already underway
"We are on track to generate several hundred million dollars of revenue from HBM in fiscal 2024 and expect HBM revenues to be accretive to our DRAM and overall gross margins starting in the fiscal third quarter," he added.
"Our HBM is sold out for calendar 2024, and the overwhelming majority of our 2025 supply has already been allocated."
That demand helped Micron not only post a surprise fiscal-second-quarter profit of 42 cents a share, firmly ahead of Wall Street's forecast for a loss of 25 cents, but also forecast current-quarter revenue in the region of $6.6 billion.
New customers are in the pipeline, Micron said, as the HBM's boosted capacity helps clients "pack more memory per GPU, enabling more powerful AI training and inference solutions."
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'Micron delivered the goods': Cantor Fitzgerald
"Expectations were high, but Micron certainly delivered the goods," said Cantor Fitzgerald analyst C.J. Muse, who lifted his price target on the shares by $15 to $135 following last night's earnings report.
"The May [quarter] outlook is better any way you slice it [while] management expressed a vision for record corporate revenues in FY25 ... and we readily agree," he added.
CFRA analyst Angelo Zino, meanwhile, notes that a better pricing environment for Micron's DRAM sales, "as well as upside that can be seen from High Bandwidth Memory tethered to Nvidia's H200," positions Micron well heading into the back half of its fiscal year.
Zino lifted his Micron price target by $16 to $100 a share while affirming his buy rating on the stock.
"Given content gain potential and increasing shift towards higher-value AI servers, we think MU's multiple could expand versus historical levels (not in our analysis), which could offer upside ahead," he added.
Micron's profit-margin recovery firmly on track
Micron's HBM sales also come with wider profit margins. The group now sees an adjusted gross margin of around 26.5% for the current quarter, up from 20.5% over the three months ended in February.
HBM carries a higher cost, but it also carries significantly higher pricing because it brings such great value in the applications in terms of its performance and power," Mehrotra told investors late Wednesday.
"We are pleased that in this quarter when we have begun our production shipments, we will be having it accretive to our gross margins in the quarter," he added. "And of course, this momentum will continue to build in the quarters ahead."
KeyBanc Capital Markets analyst John Vinh, who lifted his Micron price target by $20 to $135 a share, said the margin-recovery story should extend into 2025, thanks in part to a better product mix and improved pricing.
Other price target changes include Needham's N. Quinn Bolton, who took his to $120 from $100, and Wells Fargo's Aaron Rakers, who raised it by $10 to $135 a share.
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The highest price target on Wall Street, however, comes from Rosenblatt analyst Hans Mosesmann, who lifted it by $85 to $225 as he predicted that "we are about to witness the biggest memory cycle in history."
"Micron crushed its February-quarter print and May-quarter outlook on strong AI momentum, general market recovery, and a faster-than-expected impact to DRAM supply on aggressive HBM3e wafer allocation," Mosesmann's team wrote.
"The memory cycle we are about to witness will be the biggest in history, driven by an AI cycle that is revolutionizing compute in a secular fashion."
Micron shares were marked 14.5% higher in early Thursday trading to change hands at $110.06 each, a move that would extend the stock's six-month gain to around 62.5%.
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