Micron releases its results tonight, will the storage super cycle face another test?

The market expects Micron's net profit in the fourth fiscal quarter to surge by over 1000% year-on-year, with revenue growth exceeding 350%. However, the stock price has rebounded by more than 40% since its July low, and some of the positive performance has already been factored into market expectations. Compared to the quarterly results, investors are more concerned about management's assessment of the capital expenditure plans of the large-scale cloud providers AI for 2027, as well as whether the rise in memory prices will continue. These factors will be key in the subsequent revaluation of Micron's stock price.

Micron Technology ($MU.US)$ will release its financial report after the close of U.S. stocks on Wednesday. The market's focus has shifted from the actual performance to the management's outlook on the capital expenditure plans of ultra-large-scale cloud computing customers for next year ($AI). This outlook will directly determine whether the 40% rebound in the stock price since its July low can continue.

Against the backdrop of continued strong demand for AI infrastructure, Micron's stock price has rebounded by more than 40% from its low on July 29th, with a market value increase of approximately $370 billion. Daniel Morgan, a senior investment portfolio manager at Synovus Trust, stated that if management clearly indicates during the financial report conference call that "they do not expect large-scale customers to significantly cut their capital expenditure budgets next year and anticipate that spending will continue," this would provide a strong catalyst for the stock price.

However, despite the strong fundamentals recently, Micron's stock price is trading at a forward price-earnings ratio of around 7 times, which is significantly lower than the average of around 10 times over the past two years and also far behind the 19 times of the S&P 500 index. Market expectations for a significant slowdown in growth during the fiscal years 2027 to 2028, as well as the inherent cyclical risks of the memory industry, continue to suppress valuations.

Earnings are expected to be revised upward, but the margin of increase is narrowing.

Analysts generally expect Micron's performance this quarter to reach a record high, but the room for upward revision has narrowed compared to previous quarters.

According to the average forecasts of analysts compiled by Bloomberg, Micron is expected to report a net profit of $36 billion and revenue of approximately $51.5 billion for the fourth quarter of its 2026 fiscal year, which ended in August. These figures represent growth of over 1,000% and 350% respectively compared to the same period last year. The gross margin is expected to reach 86%, a significant increase from 46% in the fourth quarter of the 2025 fiscal year.

A team led by Morgan Stanley analyst Joseph Moore predicts that revenue for this quarter will be $50.024 billion, a quarter-on-quarter increase of 20.7% and a year-on-year increase of 342.1%, which is slightly lower than the market consensus. The team's forecast for gross margin is 86.4%, higher than the market consensus of 85.3%; the forecast for earnings per share is $31.20, which is slightly lower than the market consensus of $31.49.

In a research report on September 28, Morgan Stanley indicated that it expects earnings to be revised upward this quarter, although the increase will be smaller than in the previous quarters. The team believes that currently, there is strong demand in the DRAM and NAND markets with rising prices, but some long-term agreements have price caps in place. Additionally, since this quarter is a 14-week quarter, this may present certain technical obstacles.

Outlook for the next quarter: Pricing momentum continues, and revenue is expected to exceed expectations.

For the next fiscal quarter ending at the end of November, Morgan Stanley forecasts revenue of $57.56 billion, a month-on-month increase of 15.1% and a year-on-year increase of 321.9%, which is higher than the market consensus forecast of $56.644 billion. Among them, the price of DRAM is expected to rise by 12% month-on-month, and the price of NAND is expected to rise by 10% month-on-month. The gross margin forecast is 88.1%, which is higher than the market consensus forecast of 85.3%; the earnings per share forecast is $35.57, also higher than the market consensus forecast of $35.07.

Morgan Stanley believes that the current upward pricing in the DRAM market has become a consensus among market participants, and the NAND market is also gradually forming a consensus after significant upward revisions to forecasts in Trendforce. The team estimates that entering the fourth calendar quarter, memory prices have risen by 15% to 20% from the previous quarter, with some categories experiencing even higher increases.

In terms of demand structure, Morgan Stanley pointed out that despite certain uncertainties in the consumer market, supply has been continuously shifting towards the enterprise market. Moreover, their channel research indicates that the memory purchased by enterprises is deployed immediately, thus limiting the risk of inventory backlogs.

Core dispute: Cyclical sustainability, rather than the level of prosperity

The market's core debate regarding Micron has shifted from "how good will the prosperity be" to "how long will this good fortune last," and this shift has profound implications for the re-pricing of the stock price.

According to Bloomberg data, Micron's revenue growth is expected to slow significantly from 247% in fiscal year 2026 to 96% in fiscal year 2027, and further shrink to 12% in fiscal year 2028. This sharp decline in the growth curve is at the core of the current discount of its 7-times forward price-earnings ratio valuation.

Janus Henderson Senior Stock Analyst Shaon Baqui stated that if the memory industry can maintain a gross margin of over 80% and sustain continuous cash flow, it is ultimately expected to drive the re-pricing of stock valuations to higher price-earnings ratios.

Morgan Stanley listed three major concerns investors have regarding the sustainability of this upward cycle: first, the risk of server downgrading (de-specking); second, the expansion of memory supply in China; and third, the overall increase in supply driven by capital expenditure. In response to these concerns, the team stated that the price sensitivity of computing power deployment (AI) to memory demand is relatively low, and it is difficult for China's supply expansion to surpass that of Western manufacturers under the current circumstances. Moreover, their industry research indicates that supply and demand will be even tighter in 2027 and 2028 than they are now. Morgan Stanley maintains its overweight rating on Micron and a target price of $1,200.

Stock Price Rebound Sustainability: A Race Between Valuation Discount and Catalysts

Micron's stock price has rebounded by more than 40% from its July low, with a cumulative increase of 273% this year, making it the fourth-highest performer in the S&P 500 index. However, the stock price is still about 12% below its historical high on June 25th, indicating that the process of valuing the stock has not yet been completed.

Recently, the sentiment in the semiconductor sector has experienced significant fluctuations. On September 14th, the Philadelphia Semiconductor Index tumbled nearly 6% in a single day, triggered by the CEO of Anthropic, Dario Amodei, calling for a slowdown in the development of cutting-edge AI models to enhance security measures. Subsequently, the rise in popularity of an assistant from Meta's Muse AI reignited market confidence in the rollout of consumer-grade AI, driving the semiconductor index to rebound by more than 13%.

In addition, Morgan Stanley notes that the progress of Micron's stock repurchase program is also worth watching. Due to the restrictions associated with the Chip Act, Micron's cash returns have been limited during this cycle, and it is expected that the room for repurchases will increase after December. However, the team advises investors to maintain a cautious outlook on this matter.

Overall, the management's specific stance on the capital expenditures of ultra-large customers for AI in 2027 during this financial report conference call will become a key factor in determining whether Micron's stock price can break through its previous high and complete a revaluation of its valuation.

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