Micron Technology Inc

Micron is described as a historically cyclical memory business, with its earnings profile experiencing ups and downs. The letter discusses the cyclical nature of memory companies and the challenges in valuing them, particularly during boom-and-bust cycles. It highlights the recent spike in demand for high-bandwidth memory due to AI, which led to a global shortage and a forecast of significant free cash flow for Micron. However, the letter also expresses skepticism about the sustainability of this trend, noting that high profitability in the sector tends to attract competition, which can lead to oversupply and reduced margins.

Micron is positioned to benefit significantly from the ongoing AI infrastructure build-out, as evidenced by the expected growth in its capital expenditures. The company is projected to grow capex by 159%, reflecting the strong demand for high-bandwidth memory (HBM), DRAM, and NAND driven by AI applications. This demand is compounded by supply constraints, including cleanroom limitations and long construction lead times, which are expected to keep server demand elevated. As the semiconductor cycle becomes more structurally driven, Micron's investments are likely to enhance its competitive position in the market.

Micron has shown a remarkable turnaround, moving from a loss in FY23 to an EPS of $1.30 in FY24 and $8.29 last year, with consensus estimates exceeding $150 for FY27. This growth is driven by excessive hyperscaler spending, which has created shortages in the semiconductor market. As AI continues to dominate, Micron stands to benefit significantly from rising prices if major players maintain their spending. However, competition from cheaper Chinese models and scrutiny over AI costs could pose challenges. Despite these risks, the potential for continued price spikes makes Micron a compelling investment.

Micron Technology, a leading manufacturer of memory and storage solutions, is experiencing explosive growth driven by the AI investment boom. During the quarter ended June 30, Micron's revenue grew 346% from the prior year, and its operating income grew more than 14-fold. The stock soared 241.7% during the second quarter alone, significantly outperforming the Philadelphia Stock Exchange's Semiconductor Sector index, which gained 87.8%. This growth positions Micron as a key player in the expanding AI data center market, highlighting its strong competitive advantage.

Micron has tripled year to date, indicating strong performance in the memory chip sector. The combined operating income of Micron and its peers, Samsung and SK Hynix, exceeds $380 billion, surpassing the combined income of major tech companies like Microsoft and Amazon. Despite being loss-making in 2023, these memory companies are now among the most profitable in history, driven by the demand for AI equipment. The cash flow from hyperscalers into AI equipment sellers is substantial, suggesting a robust future for Micron.

Micron Technology is attracting significant interest on the back of extraordinary near-term earnings revisions. However, this near-term boom does not change the fact that Micron sells a commodity with essentially no sustainable competitive differentiation and a long history of highly cyclical and poor long-term returns on invested capital. We are well aware of how severe the short-term shortage in memory semiconductors is, but capitalism has a way of solving such shortages faster than one might think.

Micron Technology's profit surge is one for capitalism’s history books. Memory company earnings will surely grow over the next few years, at least until demand cools and/or supply shortages wane. The current semiconductor cycle is historic, and demand signals from customers indicate AI-related growth of over 50% per annum through 2029. This positions Micron favorably in a booming market, especially as the company benefits from significant pricing power and margin increases during this cycle.

During the quarter, Micron Technology, Inc. shares skyrocketed +242% as market sentiment shifted from AI 'adopters' to AI 'enablers.' This significant increase reflects a changing cycle in the semiconductor industry, which is typically known for its cyclicality. The manager believes that the current valuations suggest a shift in this cycle, indicating a potential for continued growth. The focus on AI technology positions Micron favorably in the market, aligning with the broader tech surge.

Memory chip manufacturer Micron is forecast to have an operating margin exceeding 80% next fiscal year, which is over 10x its average 30-year margin of ~8%. The semiconductor industry is benefiting from the cash flow generated by AI demand, and Micron stands to gain significantly from this trend. Despite the competitive landscape, the current demand for memory chips driven by AI applications positions Micron favorably for substantial profit growth in the near future.

Micron was among the most significant individual detractors within our portfolio this quarter. Despite the broader market's strong earnings environment, Micron's performance did not align with the positive trends we observed in other sectors. This underperformance highlights concerns regarding its competitive position and earnings trajectory, which we believe may not improve in the near term. As a result, we have decided to reduce our exposure to Micron.