The chip industry is a typical industry that combines growth and cyclical characteristics. For NVIDIA, a leading company in computing chips, the market sees more growth, while for the memory chip giant Micron Technology, it witnesses more of the cyclical nature of the chip industry.

The storage chip sector is an industry with very obvious cyclical fluctuations, and Micron's stock price is also known for its high volatility, experiencing multiple highs and subsequent new highs.

On December 18th, Micron will release its latest performance. Every time the company releases its performance, it may also signify a good trading or investment opportunity. Before that, investors need to understand how to interpret its performance.

How should we interpret Micron's performance? We can focus on three key points to track its growth and cyclical nature: revenue growth, profitability, and inventory changes.

1. Revenue Growth

Micron's memory chips mainly consist of two types. The first type is DRAM, which is commonly known as memory, accounting for nearly 70% of total revenue. The second type is NAND, which is flash memory, including solid-state drives, USB drives, etc., accounting for approximately 30% of revenue.

We may often see in the news that the prices of electronic products such as memory and hard drives have risen or fallen sharply. Behind these price fluctuations are the ups and downs of Micron's performance. For example, from fiscal year Q1 2018 to now, Micron's quarterly performance has experienced over 50% high-speed growth and also more than -50% negative growth in its darkest moments. After ups and downs, Micron's revenue in 2024Q3 is about 6.81 billion, almost the same as in 2018Q1. However, in the past few quarters, Micron Technology's revenue growth trend has continued to improve, with a consecutive three quarters of year-on-year growth rate staying above 50%.

So, what about the prospect of Micron's future revenue growth? We can focus on 3 indicators.

First, of course, the price trend of memory chip products. During the price increase cycle, Micron's revenue will also rise, while in the price decline cycle, Micron will also find it difficult to thrive on its own.

The cyclical nature of the memory chip industry largely stems from changes in the supply and demand structure of products. When products are in short supply, prices rise, making it profitable for companies, which will then expand production to increase supply, gradually stabilizing prices; when products are oversupplied, prices fall, companies incur heavy losses, leading to gradual production cuts, and prices slowly stabilize and rebound. Due to the time required for expansion and the gradual nature of production cuts, the trend of product prices increasing or decreasing often continues for a long period of time until a turning point arrives.

For example, starting from the fourth quarter of the 2022 fiscal year, the prices of Micron's main memory products began to plummet, with its revenue also showing an accelerated decline. By September 2023, memory prices began to stabilize and rise, Micron's revenue also began to return to growth in the first quarter of the 2024 fiscal year, with a year-on-year growth rate of over 90% in the fourth quarter of the 2024 fiscal year. Its stock price also reached a new high driven by rising product prices and revenue growth. In the future, we can continue to observe whether the prices of memory chip products can sustain the upward trend.

The second indicator is the change in market share. In a situation where the market space remains unchanged, an increase in market share naturally favors revenue growth. Historically, Micron's market share has been relatively stable. For example, in the memory market, Micron's market share has fluctuated around 22%, ranking behind Samsung and SK hynix.

In the future, the battle among the three memory giants in the memory market depends on each company's production capacity on one hand, and also on the technological gap between them on the other. Currently, the production capacity layout of the three companies is basically stable, and the technological gap is not significant. If Micron can make a major breakthrough in technology in the future, quickly mass produce, reduce memory costs, and improve efficiency, it will help to capture more market share, thus driving revenue growth. Conversely, if the R&D falls behind, and the technology lags, there may be a risk of losing some customers and market share.

The third indicator is the production capacity and shipments of HBM (High Bandwidth Memory). HBM is mainly used in AI servers, and driven by the boom in artificial intelligence, demand is growing rapidly, currently facing a situation of undersupply.

Micron accelerated shipments of HBM in the third quarter of 2024, with shipments of hundreds of millions of dollars in the 2024 fiscal year, significantly lagging behind the first-mover advantage of SK Hynix. However, the company is expected to ship around tens of billions of dollars in the 2025 fiscal year, rapidly increasing its market share. In the future, we can focus on observing whether Micron's HBM revenue can significantly increase as expected by management and occupy a market share equivalent to a significant portion of the overall memory market.

2. Profitability

Compared with revenue growth, Micron's profitability is more sensitive to industry cycle changes. When product prices decrease, revenue may only drop proportionally, but since many costs are rigid and will not decrease much, profits will naturally decline more rapidly. Conversely, when product prices enter an upward cycle, the company's profitability will also have greater flexibility. Specifically, we can observe two indicators: gross margin and net profit margin.

From the perspective of gross margin, during periods of high industry prosperity, Micron's adjusted gross margin can exceed 60%. However, in the previous downturn cycle, starting from the fourth quarter of the 2022 fiscal year, Micron's gross margin began to plummet cliff-like. In just three quarters, the gross margin dropped from nearly 50% to a loss of -31.4%, a rapid change, one might say it was like going from feast to famine. Fortunately, with the stabilization and rebound of product prices in the memory chip industry, Micron's loss began to narrow, eventually turning into a profit, with the gross margin rebounding to about 36.5% in the fourth quarter of the 2024 fiscal year.

From the perspective of net profit margin, the trend of change is basically consistent with the gross margin. During the most prosperous period, Micron's adjusted net profit margin exceeded 50%. However, in the trough of the 2023 fiscal year Q2 quarter, the adjusted net profit margin was -56.3%, indicating a severe loss. Fortunately, in the subsequent quarters, Micron's adjusted net losses gradually narrowed, turning into profitability in the past three fiscal quarters, with the adjusted net profit margin reaching 17.2% in the 2024 Q4 fiscal quarter.

In the upcoming quarters, we can continue to observe whether the memory chip industry cycle will sustain its upward trend, and drive Micron's gross margin and net profit margin levels to further rebound.

3. Inventory Changes

For industries with strong cyclicality like memory chips, inventory levels are a very important leading indicator to measure cycle changes and growth expectations. When industry demand declines and oversupply occurs, company inventory levels will rise, increasing sales pressure and bringing downward pressure on stock prices. Conversely, when the cycle reverses, and demand improves, company inventory levels will rapidly decrease, and sales prospects will also improve.

The appropriate measure of changes in inventory level is inventory/revenue ratio. The higher the ratio, the higher the inventory level, and the greater the sales pressure.

Micron Technology's inventory/revenue indicators have mostly been above 60% in the chip industry, facing significant inventory management pressure in the long term. Due to the strong cyclicality in the memory chip industry, the fluctuation of its inventory/revenue indicators is also very apparent.

During periods of high cyclical prosperity, Micron's products are in short supply, with inventory/revenue indicators below 50%. However, during downturns in the cycle, there is product oversupply, leading to rapid inventory accumulation. For example, in the Q4 fiscal quarter of 2022, Micron's inventory/revenue indicators sharply increased from 65% in the previous quarter to 100.3%, and continued to climb to 222.8%, maintaining above 200% for four consecutive quarters thereafter.

Until the cycle warms up, Micron's inventory begins to slowly deplete, and its inventory/revenue indicators also begin to gradually decline, at about 114.5% in the 2024Q4 fiscal quarter, still at a very high level. It can be seen that the current recovery of the memory chip cycle is not particularly strong. In the future, we can further determine whether the industry cycle is accelerating warming by the changes in Micron's inventory/revenue indicators.

Having read this, you may have some new insights on how to interpret Micron Technology's performance. It is worth mentioning that each earnings release of many prominent companies may present a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors think that the bullish and bearish direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance release, then investors may consider the straddle strategy of buying call and put options to capture potential opportunities.

In conclusion,

For Micron's performance, we can focus on observing its revenue growth, profitability, and inventory changes.

In terms of revenue growth, we can observe the changes in memory chip product prices, market share changes, and the shipment status of HBM products to determine whether it can continue the rebound trend in revenue growth.

Regarding profitability, Micron's gross margin and net profit margin are mainly affected by product prices. We can observe whether the storage chip price cycle can continue to rise and further enhance Micron's profitability level.

In terms of inventory changes, we can observe the trend of Micron's inventory/revenue indicators to determine if the industry cycle is experiencing accelerated recovery.

Every time a company releases its business performance, it may bring potential trading opportunities. Investors can consider suitable trading varieties based on their personal risk tolerance.

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