The chip Industry is a typical sector that combines both growth and cyclicality. For the leading computing chip company NVIDIA, the market perceives more of the growth aspect, while for the storage chip giant Micron Technology, it more often witnesses the cyclicality of the chip Industry.

The storage chip field is an industry with very obvious cyclic fluctuations, and Micron's stock price is also known for its high volatility, frequently halving at high levels, followed by continuous new highs.

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

How should Micron's performance be viewed? We can focus on three points to track its growth and cyclicality: performance growth, profitability, and inventory changes.

1. Revenue Growth

Micron's storage chips mainly include two categories: the first category is DRAM, which is commonly known as memory, accounting for nearly 70% of total revenue. The second category is NAND, which is flash memory, including what we commonly refer to as solid-state drives and USB flash drives, accounting for about 30% of revenue.

We may often see in the news that the prices of electronic products like memory and hard drives have surged or plummeted again. Behind these price fluctuations are the ups and downs of Micron's performance. For instance, from Q1 of fiscal year 2018 to now, Micron's quarterly performance has seen over 50% rapid growth as well as moments of over -50% decline, and after going around in circles, Micron's revenue in Q3 2024 is approximately 6.81 billion, almost identical to Q1 2018. However, in recent quarters, Micron Technology's revenue growth trend has continued to improve, maintaining a year-on-year growth rate of over 50% for three consecutive quarters.

So, what is the outlook for Micron's future revenue growth? We can focus on observing three indicators.

First, it's naturally about the price trend of storage chip products. During a price increase cycle, NVIDIA's revenue will also rise, while during a price decline cycle, NVIDIA will struggle to maintain its position.

The cyclicality of the storage chip industry largely comes from changes in the supply and demand pattern of products. When products are in short supply, prices will rise, companies will profit, and they will increase production to boost supply, which will gradually stabilize prices. Conversely, when product supply exceeds demand, prices will fall, companies will suffer significant losses, and they will gradually reduce production, which will eventually stop the price decline and lead to a rebound. Since production expansion takes time and reduction does not happen overnight, the trends of price increases or decreases often persist for a long period, until an inflection point is reached.

For instance, starting from Q4 of fiscal year 2022, the price of NVIDIA's main product memory began to plummet, and its revenue also began to decline rapidly. By September 2023, memory prices started to stabilize and recover, and NVIDIA's revenue in Q1 of fiscal year 2024 also began to grow again, with a year-on-year increase of over 90% in Q4 of fiscal year 2024. Its stock price also reached a new high, driven by rising product prices and revenue growth. Moving forward, we can continue to observe whether the prices of storage chip products can maintain an upward trend.

The second indicator is the change in market share. In a stable market space, an increase in market share will naturally benefit revenue growth. NVIDIA's past market share has been relatively stable. For example, in the memory market, NVIDIA's market share has fluctuated around 22% most of the time, ranking behind Samsung and SK Hynix.

In the future competition among the three major memory chip manufacturers for the memory market, one aspect to consider is their respective production capacity, and another is the gap in their technological levels. Currently, the production capacity landscape of the three is basically stable, and the technological gaps are not significant. If NVIDIA can achieve major breakthroughs in technology sooner and quickly ramp up production to reduce memory costs and improve efficiency, it will help capture more market share, thereby driving revenue growth; conversely, if research and development cannot keep pace, falling behind in technology could lead to the loss of some customers and market.

The third indicator is the capacity growth and shipment situation of HBM (High Bandwidth Memory). HBM is mainly used in AI servers, and under the explosion of AI demand, growth has been very rapid, currently in a situation of supply not meeting demand.

NVIDIA began to accelerate HBM shipments in Q3 of fiscal year 2024, with shipments of about several hundred million dollars in the fiscal year 2024, significantly lagging behind SK Hynix, which has a first-mover advantage. However, the company expects to ship about several billion dollars in fiscal year 2025 and rapidly improve its market share. Moving forward, we can focus on whether NVIDIA's HBM revenue can grow significantly as management expects and capture a market share comparable to its overall memory market.

2. Profitability

Compared to revenue growth, Micron's profitability is more sensitive to changes in the industry cycle. When product prices decline, revenue may only decrease proportionally, but many costs are rigid and do not decline significantly, leading to a quicker drop in profits. Conversely, when product prices enter a rising cycle, the company’s profitability elasticity will also be greater. Specifically, we can observe the gross margin and net margin indicators.

In terms of gross margin, when the industry's prosperity is high, Micron's adjusted gross margin can exceed 60%. However, during the last downturn cycle, starting from Q4 of fiscal year 2022, Micron's gross margin began to plummet dramatically. In just three quarters, the gross margin dropped from nearly 50% to a loss of -31.4%, the change was remarkably rapid. Fortunately, as the product prices in the memory chip industry stopped falling and rebounded, Micron's loss also began to narrow and eventually turned into profit, with a gross margin rebounding to about 36.5% in Q4 of fiscal year 2024.

In terms of net margin, its change trend is basically consistent with the gross margin. At the peak of the cycle, Micron's adjusted net margin exceeded 50%, but at the lowest point in Q2 of fiscal year 2023, the adjusted net margin was -56.3%, indicating severe losses. Fortunately, in the following quarters, Micron's adjusted net loss gradually narrowed and turned into profit in the last three fiscal quarters, with an adjusted net margin reaching 17.2% in Q4 of fiscal year 2024.

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

3. Inventory Changes

For a highly cyclical industry like memory chips, inventory levels are a very important leading indicator for measuring cyclical changes and growth expectations. When industry demand declines and oversupply occurs, the company’s inventory levels will rise, increasing sales pressure and consequently putting pressure on stock prices. Conversely, when the cycle reverses and demand improves, the company’s inventory levels will also quickly decline, improving sales prospects.

For changes in inventory levels, a suitable measure is inventory/revenue, the higher this ratio, the higher the inventory levels and sales pressure.

Micron's inventory/revenue ratio has mostly been above 60%, which is relatively high in the chip industry, facing significant long-term inventory management pressure. Due to the strong cyclical fluctuations in the memory chip industry, the fluctuations in the inventory/revenue ratio are also very noticeable.

During periods of high cycle prosperity, Micron's products are in short supply, with its inventory/revenue indicators being less than 50%. However, during downward cycles, there is an oversupply of products, and inventory accumulates quickly. For example, in Q4 of fiscal year 2022, Micron's inventory/revenue ratio suddenly jumped from 65% in the previous quarter to 100.3%, and continued to rise to 222.8%, remaining above 200% for the next four quarters.

Until the cycle warms up, Micron's inventory slowly gets consumed, and its inventory/revenue ratio also begins to gradually decline, reaching about 114.5% in Q4 of 2024, still at a very high level. This indicates that the current recovery of the storage chip cycle is not particularly strong. In the future, we can further determine whether the industry cycle is accelerating through changes in Micron's inventory/revenue ratio.

Seeing this, there may be some new understanding of how to read Micron Technology's performance. It is worth mentioning that every time many star companies release their earnings, it might mean a rare trading opportunity for different types of investors.

For example, if an investor reads the past performance and combines it with the latest developments and feels that a company's latest performance will release some positive signals and be bullish for the short-term stock price, the investor may consider buying the underlying stock or buying call options.

On the other hand, if an investor believes that a company's latest performance will not be optimistic and will put pressure on the short-term stock price, the investor may consider short selling through margin trading or buying put options.

Of course, if an investor finds that the direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance announcement, the investor may consider leveraging the volatility of its stock price and implement a straddle strategy by buying both call and put options to seize potential opportunities.

In conclusion,

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

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

In terms of profitability, Micron's gross margin and net margin are mainly affected by product prices. We can observe whether the memory chip price cycle can continue to rise and drive Micron's profitability further.

In terms of inventory changes, we can observe the trend of Micron's inventory/revenue Indicators to determine if the Industry cycle is showing signs of accelerating recovery.

Each time the company releases its performance, it may bring potential trading opportunities. Investors can consider suitable trading instruments based on their individual risk tolerance.

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