Up 35% YTD, can Micron Technology keep rising?

Another day, another blowout earnings report from a semiconductor company, as Micron Technology (NASDAQ:MU) posted strong fiscal second-quarter earnings on Wednesday after the closing bell.

In fact, Micron crushed earnings and revenue estimates and called for continuing growth in its fiscal third quarter, driven mainly by its artificial intelligence-enabled chips. The company was the biggest mover on the S&P 500 Thursday morning, rising some 15% to about $111 per share. Micron stock is now up by about 35% year to date.

Let’s dive into the earnings report and see if Micron stock is still a good buy.

Benefiting from AI

Semiconductor stocks, especially those that develop chips proficient at handling more complicated AI-enabled tasks, have been leading the market over the past year. Over the past 12 months as of March 20, semiconductor stocks have notched an average return of 110% — more than double the average return of the next-closest segment in the technology sector. Micron is slightly below the semiconductor average with a one-year return of just 90%, but most investors will take that.

The company specializes in making memory and storage chips for computers, smartphones, data centers and other applications. Micron’s data-center segment has been powering its revenue lately, as its high-bandwidth-memory (HBM) chips have been in high demand.

Overall, Micron’s revenue hit $5.8 billion in the quarter, up 57% year over year, while its net income hit $793 million or 71 cents per share, up from a $2.3 billion loss in the same quarter a year ago. After subtracting the cost of goods sold, Micron’s gross margin was $1.1 billion, or 18.5% of revenue.

The Compute and Networking unit is the company’s largest, with revenue of $2.2 billion in the quarter driven in large part by data center revenue. Further, Micron’s Storage Business Unit saw its revenue spike 79% year over year to $905 million, with revenue from data centers doubling.

“We are in the very early innings of a multi-year growth phase driven by AI as this disruptive technology will transform every aspect of business and society,” President and CEO Sanjay Mehrotra said on the earnings call. “The race is on to create artificial general intelligence, or AGI, which will require ever-increasing model sizes with trillions of parameters. … We view Micron as one of the biggest beneficiaries in the semiconductor industry of this multi-year growth opportunity driven by AI.”

Is Micron a buy?

Micron is well-positioned to grow with the AI boom, as Mehrotra discussed on the call. He cited the company’s HBM3E solution, which provides more than 20 times the memory bandwidth of the standard offering.

“We commenced volume production and recognized our first revenue from HBM3E in fiscal Q2 and now have begun high-volume shipments of our HBM3E product,” Mehrotra added on the call.

In addition to the higher capacity, it has 30% lower power consumption, which is contributing to strong demand. He noted that the HBM3E chip will be a part of NVIDIA’s H200 Tensor Core GPUs. Mehrotra also said the company is on track to generate several hundred million dollars of revenue from its HBM chip in fiscal 2024.

Micron’s outlook for the fiscal third quarter calls for $6.6 billion in adjusted revenue, +/-$200 million. At the center of the range, it would represent a 14% increase over the last quarter. The gross margin is projected to be in the range of 26.5%, +/-150 basis points; up from 18.5% in the last quarter. Further, operating expenses are targeted at $990 million, +/-$15 million, up from $959 last quarter. Micron also guided for adjusted earnings per share for Q3 of 45 cents per share, +/-7 cents, versus 42 cents in Q2.

The chipmaker was unprofitable last year due to higher investments and stagnating sales for its regular memory chips. However, the investments in its HBM AI chips are already starting to pay off as it looks to ride the AI wave.

Micron forecasts another profitable quarter in Q3 and should see continued earnings accretion from its HBM chips. I’m a little wary in the short term, given the company’s rising price-to-sales ratio, and things could flatten out a bit after this surge today. However, over the longer term, there is a lot to like about Micron.