Micron Rides the AI Boom to Record Profits: A Look at the HBM Future

AI Boom Reshapes the Memory Market: Micron's Ascent

Memory chip manufacturer Micron (MU) was initially slow to embrace the high-bandwidth memory (HBM) chip market. HBM is crucial for artificial intelligence accelerators, providing the substantial bandwidth necessary to effectively run AI workloads. In the early stages of the AI boom, Micron was largely absent from the scene. However, this situation has dramatically shifted. Micron has successfully increased HBM chip production and is actively developing its next-generation HBM4. As manufacturers prioritize HBM, demand for standard DRAM chips is exceeding supply, leading to strong pricing. These factors have contributed to Micron's blockbuster results.

The Mother of All Up Cycles

The memory chip market is cyclical due to the commodity nature of memory chips. The current up cycle might have already concluded if not for the AI boom. Demand for PCs and smartphones is not particularly robust, with both markets experiencing considerable weakening following pandemic-era booms. But AI has revolutionized the landscape. Manufacturers are racing to increase HBM supply as hundred-billion-dollar AI infrastructure deals are being made. This prioritization of HBM over standard DRAM is putting pressure on DRAM supply, driving up prices. Micron is not only selling significant quantities of high-priced HBM chips but also benefiting from rising DRAM prices. Micron's total revenue in the fourth quarter of fiscal year 2025 was $11.3 billion, a 46% year-over-year increase. Approximately four-fifths of this total came from DRAM, including HBM. HBM revenue alone was nearly $2 billion in the quarter, putting HBM revenue at an $8 billion annual revenue run rate. It wasn't long ago that Micron's HBM revenue was essentially zero, making this a remarkable achievement. For standard DRAM, Micron anticipates growing its bit supply for calendar year 2025 at a slower rate than industry bit demand. Combined with improved demand and constrained supply growth from other suppliers, the company expects DRAM supply growth to remain muted into 2026, which should exert upward pressure on pricing.

Exploding Profit Margins

Micron's profit margins are soaring under these circumstances. Adjusted gross margin was 46% in the fourth quarter, and adjusted operating margin was 35%. Both metrics increased significantly year-over-year. For the first quarter of fiscal year 2026, Micron projects adjusted gross margin to expand to a range of 50.5% to 52.5%. Historically, it has been uncommon for Micron's GAAP gross margin to exceed 40%. GAAP gross margin was only slightly lower than non-GAAP gross margin in the fourth quarter, easily surpassing that level.

Potential Risks and Considerations

As long as demand for AI infrastructure, and consequently demand for HBM, continues to thrive, Micron will be in a favorable position. Major AI infrastructure deals are emerging frequently. OpenAI reportedly agreed to pay Oracle $300 billion over five years for AI infrastructure, and Nvidia made a $100 billion investment to fund AI infrastructure investments. Other tech giants, including Microsoft and Meta, are also investing heavily in AI data centers. Currently, demand for HBM seems likely to accelerate as these AI infrastructure investments unfold. However, it's crucial to consider potential risks. These investments are based on assumptions about future demand for AI computing and the future capabilities of AI models. If this demand does not materialize or falls short of expectations, one possible outcome could be a significant oversupply of HBM chips. In this scenario, the current strong up cycle Micron is experiencing could transition into a potentially severe down cycle. Micron has reported negative gross margins during the worst down cycles in the past as prices plummeted. The next down cycle could be equally challenging. Of course, predicting the future of the AI industry several years out is difficult. However, investors considering Micron stock should remember that memory chip up cycles are not permanent.