Key insights
- Micron's strong earnings and guidance beat expectations, driven by high bandwidth memory (HBM) demand. However, an analyst suggests that Micron's margins may be peaking at 81%, which is unsustainable. This concern is driving a sell-off despite strong fundamentals. While HBM supports higher margins, the overall sustainability of such high margins is questioned based on historical memory industry cycles.
Micron (MU) reported second quarter results and third quarter guidance on Wednesday that beat analyst estimates.
CFRA Research senior vice president and equity analyst Angelo Zino joins Market Domination Overtime host Josh Lipton to discuss Micron's record margins and CapEx outlook, highlighting what investors should be watching in the memory chip market.
Micron reports, give us the instant analysis. What'd you make of the print?
The print was really good. They crushed it by nearly 4 billion in terms of the expectations and then, you know, clearly that trickle down into the the earnings as well. I think the the guidance was even more phenomenal. I think about 33 billion or so for the May quarter. Uh, you know, about 10 billion or so above what we had expected. Maybe the most important figure was the the gross margin number for the the May quarter. They guided to 81%. I think we were looking for about 71%.
And I think the the reason you're seeing a a bit of a a push back or a sell-off here after hours might be the fact that, hey, listen, you're essentially now buying this stock at, you know, peak margins or near peak margins because it's unlikely that these type of margins are going to be sustained here um in the foreseeable future. But that doesn't necessarily mean that the fundamentals have to stop improving.
Why do you say uh you may be at peak margins here? What are the puts and takes there?
As far as gross margins, I mean 81% margins is just it just seems like it's unsustainable, right? I mean, you you look at prior peak cycles in terms of the the memory industry for for a company like Micron, you were talking maybe, you know, something along the lines of 50% margins.
What's going on on the data center side, what's happening with high bandwidth memory. High bandwidth memory is by far the most complex uh product that's ever been made for the memory industry. It does command higher margins. It's just a a favorable mix overall as uh Micron continues to shift towards that side of things.
And what Micron did state is they're going to have to significantly increase uh CapEx spend probably at a run rate um faster than revenue at some point in time potentially going into 2027.
Well, they did Angelo. They yeah, this 2026 CapEx number here, uh they're seeing the bogey they say is above 25 billion. Consensus was more like 22 billion.
To be honest with you, that's not that bad. Uh 25 is perfectly fine when you actually look at the revenue, how high the revenue number went up, right? So, uh but more importantly, I think it's going to be, um what is the visibility? What does 2027 look like? I it's not something that they're probably going to provide on this call. They did say it's going to be significantly higher than what it is in the current run rate, but that that's to be expected.
Micron's dealing with Samsung, SK Hynix. Uh how do you think about, Angelo, who has the competitive sort of technology edge here?
SK was really the, you know, they were the kind of the front runner and leader here as far as, you know, the shift to um high bandwidth memory and you know, their presence within Nvidia and you know, you kind of had uh Micron also, you know, with high bandwidth memory three in in Blackwell last year really kind of started to emerge.
We do like where Micron's at and I'd also say as far as a mixed percentage, and I think this is important, about 80% of their revenue right now is tied to DRAM, so they are kind of heavily weighted towards that theme.
What are the big risks though I need to think about that should be on my radar with Micron? What do you say?
The biggest risk is is clearly going to be, you know, the supply demand landscape and, you know, when do we kind of hit that peak level? The unknown for Micron is what does the the the CapEx spend look like as we kind of go into the out years, specifically calendar 207.