Micron Revenue Smashes Expectations, but Wall Street Yawns

0:04Tyler Crowe:Wall Street has big expectation for memory chips now. This is Motley Fool Money.

0:20Tyler Crowe:Welcome to Motley Fool Money. I'm Tyler Crowe and today I'm joined by longtime Fool contributors Matt Frankel and Jon Quast. Got quite a few subjects we're going to talk about. We're going to jump into taking the pulse of the autonomous vehicle landscape with a recent deal between Uber and Rivian. We're going to take a look at Alibaba's earnings and some ambitious AI targets they're putting forward. But first, we're going to jump into Micron's most recent earnings and some really big numbers that didn't seem to impress Wall Street that much. The company announced earnings after the close yesterday.

0:55Tyler Crowe:And Matt, the numbers for the earnings announcement itself, it's kind of hard for me to come up with a word to capture how much the company beat earnings expectations. So, kind of put some numbers behind what we were seeing this most recent quarter.

1:10Jon Quast:Yeah, well, in simple terms, companies like Micron can't produce memory fast enough to keep up with demand of this AI infrastructure development. Micron's CEO said that the company was only able to produce 50 % to two-thirds of what its biggest customers wanted during the quarter. AI chips need a lot of memory, plain and simple. In the quarter, Micron's revenue nearly tripled year over year. You're right that the term blowout quarter doesn't even do that justice. The company's revenue was almost$24 billion and beat expectations by nearly$4 billion. Earnings beat expectations by a similarly wide margin.

1:45Jon Quast:Gross margin doubled to about 74 % year over year. A gross margin doubling for a company this mature is pretty unheard of. The pricing power that it's getting due to the supply, demand, and balance is certainly a wonderful thing. The guidance was an even stronger beat. Analysts were looking for$24.3 billion in the current quarter, the one we're in now, and the company guided for$33.5 billion. That's almost a 50 % margin. This might not be too much of a shock, and it doesn't look like it's that much of a shock to a lot of investors based on the stock price action if you've been following some of the CapEx projections of the big tech players.

2:23Jon Quast:But it's really tough to overstate how strong the AI infrastructure investment surge is making Micron's business.

2:31Tyler Crowe:You hinted at it a little bit here. John, I want to get to you. Even though the company reported earnings that were indeed impressive, the stock's down about 2.8 % as we tape. Some of that may be broader market vibes. There's concerns about whether the Fed's going to increase interest rates in the near-term future. There's the conflict in the Middle East driving up oil prices. So, there's vibes a little bit we could talk about here. But then it's also Micron's expectations, maybe. I mean, was there anything in the conference call or guidance that stuck out to you that may explain the market's kind of meh reaction?

3:07Tyler Crowe:Was it the CapEx numbers that Matt was insinuating?

3:11Matt Frankel:I don't know if it's that. Honestly, I wouldn't be surprised if Micron stock is actually up by the time that this airs. It's already recovered quite a bit from its early morning low points. I think what we have here is a great quarter. Guidance was otherworldly. Just to put the guidance in perspective, for the upcoming quarter, it expects to generate as much revenue as it has in every other year of its existence minus last year. So its next quarter is going to be a good year by micron standards. That's what we're looking at here. I think what we're going to see here is the analyst community is going to pause, is going to take a deep breath, and then it's going to start revising its earnings assumptions higher.

3:52Matt Frankel:And when that happens, I bet that micron stock will actually retake some lost ground here. I think the important context is to remember it's still up more than 300 % in the last year. So, a little bit of a cool down after reporting earnings isn't a surprise at all. But here's the thing that is really very interesting for Micron and memory stocks generally. I know it's dangerous to say it's different this time. Memory has historically been prone to boom and bust cycles. Right now, we're seeing a boom. Matt pointed out that it just simply can't make enough stuff. There are some things here that lead me to believe that it may be actually different this time with the memory market.

4:32Matt Frankel:AI may have changed this. So for example, Micron's management pointed out that it used to have some long-term agreements in place with its customers, but now it's working on something different called strategic customer agreements. The difference here is that the strategic agreements have specific commitments tied over multiple years. This is giving Micron more visibility, more ability to predict its business into the future than it ever has. In fact, it just signed its first five-year deal. It's never done that before. When you look at past boom and bust cycles in the memory space, normally it's a three to four-year cycle.

5:09Matt Frankel:And now you have a five-year deal in place. This could be the first of many five-year deals. AI may have made memory more reliable as a category.

5:17Tyler Crowe:There's part of me that says, I want to create a swear jar, but instead it's the, it's different this time jar, just to keep us in check when it comes is things like this. And after saying that, just thinking out loud here, you know, it's planned CapEx budget was pretty ambitious. These guidance numbers look pretty good. You're talking about strategic commitments, but yet I'm looking at this market reaction kind of meh. And I'm wondering if a little bit of this is going back to the cyclicality of this industry. If analysts are kind of looking at this and saying, you're overshooting future demand with this ambitious growth.

5:51Tyler Crowe:Is that the sentiment that the market's signaling here, or am I just getting caught up in a one-day market reaction?

5:58Jon Quast:I'm not sure if it's so much you're overshooting future demand as demand is going to eventually run out. There's this big surge in AI investment that's going to continue for a few more years. We see big companies putting hundreds of billions of dollars behind what they're doing. But Micron's boosting their construction spend by$10 billion over what they previously expected. They're currently building a$100 billion campus in New York. To be fair, if it can only fill half of customer demand right now, and customer demand is expected to continue to rise for a few more years, there's the case that they'll be able to fill that square footage very easily, and it'll be money well spent.

6:35Jon Quast:But this does add a big element of risk. You don't want demand to run out, and you have an empty$100 billion building eventually. It does add an element of risk. And I think that could definitely be weighing on the stock, just like we've seen with some of the other big tech companies.

6:49Matt Frankel:Yeah, I think that Matt's point earlier about the gross margin doubling year over year, that doesn't happen usually in businesses, and it's happening here. You look at the memory prices. So the solid state NAND memory, the prices there are up nearly 80 % year over year. So basically, it's selling out what it has at great prices. It's not necessarily selling a ton more stuff. The stuff is just selling at much higher prices. And that is great for margins. That's great for shareholders. It is a bit of a risk if you do eventually build up more supply capacity and simply then match demand. You might have a margin hit, and that is something to watch.

7:34Matt Frankel:However, There are some things that can keep driving demand higher over the long term. We're going to talk about autonomous vehicles here in a moment. But just as one example, Micron Management pointing out that for level two autonomy, your cars today basically need 16 gigs of DRAM. Level four is going to require 300 gigabytes. That's a 19 times increase in the memory necessities for a level four vehicle. multiply that by the number of vehicles on the road with level four someday, yeah, there is going to be much higher need for memory in the future.

8:11Tyler Crowe:I'm getting more and more fascinated by the memory chip industry based on what we have seen historically. I mean, this is a company that's trading for 21 times earnings, even though it's up 300 % over the past couple of days. Historically, this has been one of the more commoditized sides of the chip industry compared to like CPUs or GPUs. it's been a boom or bust, and it's clearly having a moment in the sun right now. Again, we're kind of touching on this, but I really want to put a stamp on the idea. Is Micron and memory chips, is this going to have lasting growth beyond AI infrastructure and perhaps a surge in autonomous vehicles?

8:48Tyler Crowe:Are we just looking up at another up and down wave, and it just happens to be amplified this time around?

8:54Jon Quast:There's certainly no sign that demand is going to slow down anytime soon. I'll say that much. Now, as I alluded to in the last section, I don't think AI infrastructure investment can just grow exponentially forever like it has been. Memory is a more vulnerable part of the chip industry to supply and demand dynamics than, like you said, CPUs and GPUs. I'm personally playing that side through my portfolio. AMD is what I consider my biggest AI investment. I'm playing that side of it.

9:23Matt Frankel:Just to throw out another name here, I would keep an eye on ASML. This is the company that makes the very expensive lithography machines that use ultraviolet light. Micron points out that next generation memory increasingly needs these EUV machines. And ASML is not quite a monopoly, but it is a very strong player in this industry. And so, I don't know. If you look at Micron and others ramping up supply, it would stand to reason that ASML machines are going to be in strong demand as well.

9:59Tyler Crowe:Coming up after the break, we're going to take a pulse of the autonomous vehicle landscape. Hey, Fidelity, what's it cost to invest with the Fidelity app? Start with as little as $1 with no account fees or trade commissions on U.S. stocks and ETFs. That's music to my ears. I can only talk.

10:34Tyler Crowe:Infrastructure isn't the only major race related to AI. Autonomous driving is being unlocked with AI capabilities, and we're seeing companies scramble to become major players in the industry. Depending on who you ask, right now, Uber Technologies is either an autonomous driving loser based on its current business model, or perhaps a hidden winner because of the platform that it's already built and the network effects that it could use to implement AI. Now, earlier today, the company announced a deal with electric vehicle maker Rivian to supply Uber with its newest R2 model vehicle. John, you read through the announcement, kind of getting a pulse of this.

11:15Tyler Crowe:What are the details of the deal and what are your thoughts?

11:18Matt Frankel:Well, if everything goes according to plan, we could see 50 ,000 fully autonomous Rivians on the Uber platform by 2031. Basically, there are 10 ,000 vehicles that are, maybe you could call that phase one of the plan. There's a$300 million investment here from Rivian and its fleet partners to purchase some Rivians, hopefully deployed in San Francisco and Miami by 2028. And then if things are going well, it can be expanded to 25 cities by 2031. And that's a 40 ,000 additional for 50 ,000 total. And you look at that, 2031, 50 ,000 vehicles. I think this is actually a far more realistic timeline of an autonomous taxi rollout than what we have seen in the past with some other players, specifically Elon Musk and Tesla.

12:10Matt Frankel:Musk has promised a million, I believe, a million fully autonomous Teslas on the road this year. And I think it's pretty clear that we're not going to be anywhere close to that by the end of this year. Uber and Rivian promising just 5 % of what Tesla's promising, 5 % of a million by 2031, so five years from now. That is probably more directionally correct when it comes to this big scale rollout. I think that the reason that Rivian has made this deal. This is actually kind of a big deal. I think Rivian needs the distribution, if you will. When you think about the future, let's say that the future of taxis is fully autonomous.

12:49Matt Frankel:I can see many people knowing the Tesla brand and going to the Tesla brand for a Tesla robo-taxi. It makes more sense to me for a Rivian to be on a third-party platform. I think it's going to need that third-party platform to stimulate enough demand for its own vehicles. Also, it's important to point out here that the partnership is exclusive. So if you're a Lyft shareholder like I am, you're not going to see Rivian's on Lyft. It is exclusively going to be on Uber. I think that that is worth talking about because if you're a third-party platform such as Uber or Lyft, you want to lock down the supply of autonomous vehicles on your platform.

13:30Matt Frankel:And so So Uber's able to get one of the players here. And hopefully Lyft is going to be able to score some as well in the future.

13:37Tyler Crowe:Coming in from the other side, I can see why Rivian would be interested. And shares are up 4.2 % as we're taping. It is trying to scale a production of this newer R2 vehicle, which is a lower priced offering that they've had so far. And pledging to a certain amount to Uber gives it some sales, like you could call it a floor on sales that aren't necessarily at the whims of the consumer and the ups and downs of consumer trends and things like that. But specifically to Uber, as you said, it's an exclusive deal. It's 10 ,000 in a couple of years, 50 ,000 by 2031. Matt, as you're looking at this from Uber's strategy, what are you seeing here?

14:18Jon Quast:Well, I like what John just said, that Uber's trying to control the supply of autonomous vehicles. What I mean by that is, this is an exclusive deal in the sense that you'll only find Rivians on Uber's platform. It's not exclusive the other way around. Uber actually has deals with several other manufacturers, including Lucid. They have a deal for 20 ,000 Lucid gravity vehicles. That's Lucid's SUV that will be on Uber's platform. There's talk that they're going to expand that even further to Lucid's smaller vehicles when they come out. It's got a partnership with Stellantis, which is the parent company of Chrysler and Jeep and all that.

14:56Jon Quast:It's a three-way deal between them and Uber and NVIDIA, because they want to not only control the supply of the cars, they want to control the whole tech stack, the software development, the hardware development, and really have a leg up when it comes to that. It feels like their strategy is to be a Tesla competitor rather than anything else, rather than thinking about competing with Lyft or anything like that. They want to be the number one.

15:23Tyler Crowe:John, you mentioned earlier Tesla, which is carving its own path with not a lot of partnerships, trying to do it all on its own and putting out some ambitious numbers. We have Alphabet with its Waymo. They have some services in a couple of cities now. They're expanding services. It's growing at a pretty decent cliff. And then we have another handful of private and public companies really looking to stake their claim on this burgeoning industry. So as you both look at the industry in general, and whether it be Uber, Tesla, or whoever you see, what companies stand out to you today in particular as compelling investment opportunities?

16:00Tyler Crowe:And to be fair, I'm not going to hold it against you if you're kind of sitting on the sidelines and seeing how it all shakes out.

16:05Matt Frankel:Well, I'm certainly biased here as a shareholder, but I do still like Lyft. I think the majority, let's just assume we go fully autonomous in the future with taxis. I think the majority of the autonomous taxis will live on these third-party platforms. Tesla maybe being one of the exceptions there. But as is, Lyft generates great cash flow. It has a very strong and growing user base. I think that it's going to be able to get some autonomous partners that are going to supply their vehicles onto its platform in the future. And also, this is something that a lot of people don't realize. It has a business segment for managing autonomous fleets.

16:47Matt Frankel:And so it's ready to pivot that direction as needed. And so I think that we forget that even if you are an autonomous taxi, you're going to still need things maintained. You're going to need your tires pumped up to the right pressure. You're going to need the vehicle cleaned out and vacuumed. So there is a need for autonomous fleet management. And Lyft already has a business segment to address that.

17:08Jon Quast:With robo taxis, I'm still mostly on the sidelines. But to be fair, I'm a little biased because I live in a rural area that doesn't even really have Uber yet. So, I'm not a big consumer of the product. But I do invest in autonomous vehicles indirectly. And autonomous vehicles, by the way, it's a much broader category than robo-taxis. It could mean just autonomous driving systems that you own. GM is one of my largest investments. AMD is a big investment of mine, and they have autonomous vehicle chips. So, Lucid is interesting to me. I think its product is generally superior to the competition. But as I've said before, a great product does not always make a great business.

17:45Jon Quast:And I really struggle to see a path to profitability. Even with these robo-taxi deals, the economics of Lucid's business have been horrible since it went public. And I need to see that change before I get really interested.

17:57Tyler Crowe:It'll be interesting to see how these partnerships shake out, especially with these newer EV companies and whether or not they can actually deliver on it. Part of me even wonders, too, like, is Uber going to be absolutely heartbroken if, say, Rivian isn't able to deliver these or Lucid or something like that? So just something to think about as we watch the autonomous vehicle market over the next several years. After the break, we're going to look at potential AI investment opportunities overseas and looking at Alibaba in particular. Introducing Fidelity Trader Plus, the next generation of advanced trading from Fidelity.

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