Micron's Potential in Artificial Intelligence may Not Be as Magnificent as Perceived
Tech giant Micron (MU -3.62%) left investors bewildered on Thursday with a quarterly report that missed Wall Street's expectations by a mile.
In the opening quarter of its fiscal 2025, Micron's performance was robust, fueled by surging demand for high-speed memory (HSM), which is crucial for AI processors. However, Micron's customers, who purchase its PC and mobile memory chips, are now wrestling with excessive inventory and have decided to scale back. Micron has forecasted revenue of $7.9 billion for the second fiscal quarter, significantly lower than the estimated $8.9 billion by analysts.
Micron is positioning itself as an AI powerhouse. The company anticipates that the HSM market will skyrocket from its current $16 billion to over $100 billion by 2030. Investors, however, appeared more concerned about Micron's challenging near-term outlook than thrilled about the AI potential on Thursday, fetching the stock a double-digit percentage loss during the trading session. While demand for HSM is expected to remain robust, it's unlikely to sidestep the cyclical tendencies of the memory chip market.
AI won't sway the narrative
A substantial portion of the DRAM and NAND chips sold by Micron and its competitors is a commodity item, and its pricing is heavily dependent on supply and demand. When demand exceeds supply, manufacturers can boost prices, leading to sky-high profits. Expanding chip manufacturing capacity is a costly undertaking, and it takes time, so supply shortages can persist for a while.
Eventually, however, memory chip manufacturers build up excessive total capacity in response to predicted future demand. Once supply surpasses demand, prices can plummet, resulting in deep losses. While chipmakers can address the oversupply situation by reducing production, one company prioritizing market share can keep a glut going for a long time. In such cases, downturns in the market typically end when the most aggressive manufacturer loses money and is compelled to cut production.
The current demand for HSM is insatiable, so prices are strong. HSM sales are boosting Micron's profit margins, compensating for its less profitable products. Projections suggest that the AI chip market may increase tenfold between 2023 and 2032, surpassing the current size of the entire semiconductor market.
If these predictions turn out to be inflated, HSM pricing could crumble, taking profit margins with it. Micron and its competitors are expanding their HSM production capacity based on the expectation of a certain rate of growth. If the AI chip market encounters obstacles for any reason, the HSM market will follow the trend that the broader memory chip market has been adhering to for years.
For Micron's $100 billion projection for the HSM market to materialize, the dynamics of the memory chip market would likely need to fundamentally change, which seems improbable.
Tame your expectations
Micron can adapt and prosper in the long term, irrespective of what transpires in the AI chip market. But its revenues and earnings will be prone to fluctuations, just as they always have been. Investors should steer clear of assuming that Micron's performance during prosperous periods is a sign of perpetual success. Micron is not a company that consistently charts a path of increasing profits year after year.
While Micron can be a lucrative investment at the right price, investors ought to remember that downturns in the chip industry are inevitable and that the AI trend won't alter that fate.
Despite Micron's ambitious plans to capitalize on the growth of the HSM market, the company's investors are more focused on the near-term challenges, such as excess inventory among Micron's customers and the potential impact on revenue. Investors looking to enter the finance arena through investing in tech stocks like Micron should be mindful of the industry's cyclical nature and the impact of supply and demand on the market.
Considering the current strong demand for HSM and its contribution to Micron's profit margins, it's essential for investors to carefully evaluate the long-term potential of the HSM market and its resilience against industry cyclical trends, as any potential drop in pricing could significantly impact Micron's profits.
