Micron's shares dropped 8% following a disappointing margin forecast that overshadowed a strong quarterly revenue outlook fueled by demand for its semiconductors used in artificial intelligence tasks.
As one of only three suppliers of high-bandwidth memory (HBM) chips for data-intensive generative AI applications, Micron indicated that its adjusted gross margin would fall short of estimates, primarily due to the impact of lower pricing for consumer memory chips on profitability.
Despite a 1.4% decline in 2024, Micron's shares have risen over 13% this year as investors anticipate improved pricing for consumer memory chips and the company’s vital role in AI supply chains.
Analysts at Rosenblatt pointed out that "NAND Flash oversupply remains a drag on margins," referencing a type of memory chip commonly used in smartphones and personal computers. Soft demand in end markets and aggressive purchasing by electronics suppliers during the pandemic have contributed to an oversupply of consumer memory chips, leading to weaker pricing.
Micron has projected an adjusted gross margin of approximately 36.5% for the third quarter, slightly below the analysts' average estimate of 36.9%. This forecast indicates a sequential decline of 3 percentage points.
"There has been a challenging industry environment in NAND," said Sumit Sadana, Micron's chief business officer, during a post-earnings call.
The company has been scaling back NAND production, leading to underutilization and consequently spreading fixed costs over a smaller output, which negatively impacts margins.
The increase in HBM production to meet strong demand for AI memory chips from GPU market leaders like Nvidia has also put pressure on margins. Nonetheless, Micron has forecasted third-quarter revenue above expectations, driven by AI-related strength.
Morningstar analysts noted the importance of high-bandwidth memory, identifying it as a key growth driver, and expressed optimism for continued demand in AI and data centers.