How Micron can remain competitive with Korean peers: Analyst

Shares of Micron (MU) are trading higher on Wednesday afternoon after the company released its second quarter report. The company reported a revenue of $5.82 billion for the quarter versus an expected $5.33 billion. Micro also issued guidance for its third quarter, estimating $6.6 billion in revenue, beating Wall Street's expectations of $6.02 billion.

New Street Research Analyst Rolf Bulk joins Yahoo Finance to discuss the drivers behind Micron's revenue beat and the broader memory space.

Bulk elaborates on the sales forecast for Micron: "What we see today is that the industry and Micron are being very disciplined when it comes to adding capacity. In memory, it is all about the equation between demand and supply. Micron is being very disciplined there and importantly the same goes for Hynix (000660.KS) and Samsung (005930.KS), the other two major players in memory, so as long as this dynamic persists of the industry being very disciplined when it comes to adding supply and demand steadily recovering, the setup is very strong for the remainder of 2024."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JULIE HYMAN: Micron just out with its second quarter earnings moments ago. Reporting a big beat on its top and bottom line. And interestingly, its sales forecast topping estimates, the stock up 13% right now on the news.

Joining us now is Rolf Bulk, Analyst at New Street Research. He is based in Singapore. And you've been going through the numbers here, Rolf. So what stands out to you? That forecast, in particular, a pretty big beat.

ROLF BULK: Yeah, it is a big beat. Thank you. Thank you for having me. So, yeah, what we see here is a 9% beat on revenue. And that is driven by an increased demand for DRAM chips.

But importantly, also, price increases in both NAND and DRAM. Now, the guide 6.4 billion to $6.8 billion, which is 10% beat. And importantly, the cost of goods sold is also guided up to increased 4% queue on queue.

Now, that signals that demand for chips is also set to further increase in the coming quarter.

JOSH LIPTON: And, Rolf, Micron, it serves so many important end markets, including PCs and smartphones. What are you expecting in those verticals in 2024?

ROLF BULK: So, PCs and smartphones, the recovery has been a bit lackluster so far. So while I do expect those segments to recover. And in particular, in PCs, I think the recovery will be second half weighted. And in smartphones, that continues to be a bit of a risk of a pullback in the higher end of the market.

But as it stands today, those markets should recover in 2024. But for micron and the broader tech space at the moment, it is all about the data center. And for the data center while high bandwidth memory, which is a massive topic in memory, doesn't do much yet for micron today. It is set to inflect a growth in the remainder of 2024 and into 2025.

JULIE HYMAN: Well, and does this sales forecast. I mean, this is not like an NVIDIA sized forecast like we got last year with the big shock forecast. But with the demand for high bandwidth memory, do you think that there is room for Micron to even beat the forecast that it's giving today. If you're calling that sort of an inflection, will we see a big upgrade even?

ROLF BULK: It's difficult to say at this point. It is heavily dependent on price development. But what we see today is that the industry and Micron are being very disciplined when it comes to adding capacity. In memory, it is all about the equation between demand and supply.

Micron is being very disciplined there. And importantly, the same goes for Hynix and Samsung, the other two major players in memory. So as long as this dynamic persists of the industry being very disciplined when it comes to adding supply and demand steadily recovering, the setup is very strong for the remainder of 2024.

JOSH LIPTON: And, Rolf, I'm also curious, what do customer inventories kind of look like right now? What are the trends we're seeing there?

ROLF BULK: They have largely normalized, fortunately, for micron. In data center, that is the last segment in which inventories have normalized. It's now very close to normal levels in that segment as well.

So on that front, everything looks OK. The industry still needs to work down the inventories that they have built up themselves. So Micron, Hynix, and Samsung do still have excess inventory on their balance sheet. And that needs to be worked down over the remainder of this year.

And what we'll see is that gross margin as a result of those inventories being worked down and prices recovering, it should continue to trend up as of these levels. And the print that they just gave is a strong testimony to that. And the same goes for the guides.

So 25% to 28% gross margin versus market expectation of 20% is a good indication that we are on track on that inventory recovery.

JULIE HYMAN: And, Rolf, finally to take a step back from today's numbers, we just got the news today that Intel was indeed the recipient of a grant from the US Commerce Department to build out production of chips in the United States. It's expected that Micron is going to be the recipient of another grant. How important is that for the company? And does that play into the investment case for the company also?

ROLF BULK: It is important to some degree. We see a large pool, if you will, of manufacturers. And this is across memory, across logic to get those funds, to build out fab capacity in the US.

Now, for Micron, they are, of course, one of the few domestic suppliers of memory in the US. It is important for them to get that subsidy to remain competitive with their larger peers in Korea.

JOSH LIPTON: Rolf, thanks so much for joining the show today. Appreciate it.

ROLF BULK: Pleasure. Thank you.