Multiple bearish factors have hit Micron Technology, Inc. (MU.US) stock price, but with solid fundamentals supporting, it is expected to return to an upward trajectory.

In the past few weeks, the stock price of Micron Technology, Inc. (MU.US) continued to experience volatile fluctuations. In anticipation of the upcoming financial report, the stock price soared to a historic high, but then dropped significantly in the following days. The factors causing this pullback are converging, but the market's reaction may have been exaggerated, and this stock is expected to quickly return to an upward trajectory. During this market trend, many people claimed that the cyclical era of the storage industry had ended, believing that structural demand from artificial intelligence (AI) would support the industry and proclaiming "this time is different", even calling Micron Technology, Inc. the "next NVIDIA Corporation". Despite explosive revenue and profit growth from Micron Technology, Inc., SK Hynix, and Samsung Electronics, the storage industry still continues to exhibit cyclical patterns. The reason is simple - the storage industry is cyclical because the end markets it serves are cyclical. Smartphones, personal computers (PCs), and processors fall into this category. However, these products were not cyclical when they first entered the market - when they first appeared, the demand seemed unimaginably high. Then, competitors entered the market, technology became commoditized, and before people realized it, the market experienced oversupply and price crashes. Therefore, believing that AI will not be cyclical is short-sighted - AI has not yet shown cyclical patterns because it has not been around long enough and has not experienced a downturn. But this does not mean that it will not happen in the future. This may sound like a semantic difference, but distinguishing this is important because many investors are currently buying Micron Technology, Inc., trying to catch the next NVIDIA Corporation, without realizing - as history has repeatedly shown - that the stock always faces the risk of a significant decline due to demand shocks. The fixed costs of storage production are very high, and expanding production usually requires years of planning and construction, which means that Micron Technology, Inc. and its Korean counterparts are far from being "agile companies". Therefore, the key to investing in Micron Technology, Inc. is not to debate whether the storage manufacturing industry still exhibits cyclical patterns, but to judge when the current uptrend will turn into a downtrend. In this context, the latest financial report from Micron Technology, Inc. is crucial. The second quarter report shows that although HBM revenue (included in the cloud storage segment) surged, driving gross margins to 74%, the QoQ increase was "only" about 800 basis points. By observing other business segments of the company, it can be seen that the gross profit margin increase is more significant in non-AI markets, with the OEM data center customers in the core data center business achieving a gross profit margin of 74%, the same as AI sales, and the mobile and client (consumer business) even exceeding by 500 basis points. The automotive and embedded business also saw a significant improvement. Therefore, while HBM has caused shortages, from a shipping volume perspective, the price increases of DRAM and NAND have brought greater profits to Micron Technology, Inc.'s non-AI businesses. This also makes sense - HBM customers originally paid a high price, so the price change is relatively small; products like DDR4 have very low production costs and can now be sold at very high prices. To capture some of the excess demand, Micron Technology, Inc. and Korean storage manufacturers are increasing their spending. Micron Technology, Inc. has committed to investing $5 billion in capital expenditures in the second quarter (while still achieving nearly $7 billion in adjusted free cash flow). But with the intensification of shortages, the "big three" continue to maintain a slow pace of expansion, as decades of industry booms and busts tell them that the best strategy is to gradually and cautiously increase supply, even if demand reaches a fever pitch. This cautious strategy will allow the storage industry to achieve supply-demand balance without triggering a price collapse, thus avoiding prematurely falling into a trough again. At the same time, this will also allow them to earn staggering profits. Micron Technology, Inc. provides the following performance guidance: it expects third-quarter revenue midpoint to be $33.5 billion (YoY +260% / QoQ +40%), gross margin of approximately 81%, and non-GAAP EPS midpoint at $19.15 (QoQ +57%). Being able to provide such forecasts shortly after experiencing a historic quarter shows that the shortage is extremely severe and indicates that demand remains very strong despite price increases. An 81% gross margin is even higher than NVIDIA Corporation! It is hard to imagine that just a few years ago (in 2023), Micron Technology, Inc. recorded negative gross margins for three consecutive quarters. This financial report basically covers the long thesis for Micron Technology, Inc. - at the current pace, the company may earn approximately $60 in EPS over the next four quarters. By the way, this corresponds to a P/E ratio of about 6 times. However, despite such performance, investors still chose to "take profits". The day after the financial report was released, Micron Technology, Inc. stock price fell by over 8%, with profit-taking sentiment overshadowing operational performance. Subsequently, with the outbreak of the Middle East war, the closure of the Strait of Hormuz, soaring oil prices, and the shift of funds to defensive stocks, the selling pressure intensified. The market as a whole entered a risk-off mode, with high beta stocks being sold off and investors turning to safer assets, leading to additional selling pressure on Micron Technology, Inc. In addition to macro pressures, there have been some negative news over the past week or so, mainly related to Alphabet Inc. Class C (GOOGL.US) launching a new quant algorithm called TurboQuant. The algorithm claims to increase the speed of key-value ("KV") caching in AI processors by several orders of magnitude. Currently, the vast majority of storage in AI processors is used for two purposes: 1) KV caching; 2) model weights. Therefore, the logic is that if the efficiency of KV caching is improved, chip manufacturers will need less storage to meet customer demands. As a result, DRAM prices fell by over 5% this week as the market began to speculate on what this might mean for future demand - although the ongoing Middle East conflict and inflation concerns may have also contributed to this decline. So, will this improvement in storage performance reduce overall bit demand and harm Micron Technology, Inc.'s growth prospects? To answer this question, we can look at real-world cases. One of the most typical is the origin of the so-called "Jevons Paradox". In the late 19th century, the famous Scottish inventor James Watt invented a highly efficient steam engine, which significantly reduced the amount of coal needed to achieve a unit energy output. The prevailing view at the time was that as efficiency increased, coal consumption would decrease. However, the reality was quite the opposite - coal became cheaper and more readily available, leading to long-term growth in overall demand. This concept is known as induced demand, essentially meaning that when the cost of a resource decreases, its consumption actually increases. With large-scale cloud providers already committing to invest billions of dollars in AI capital expenditures, storage demand will inevitably remain high for the coming years. Cheaper storage will not satisfy them with current plans - it will only further stimulate demand as they compete to win the AI arms race. Therefore, TurboQuant is not a negative catalyst for Micron Technology, Inc., and may even be viewed in the future as a "democratizing moment" for the storage industry, allowing other participants outside of the large tech companies that currently account for almost all of the HBM shipments to enter the market. Overall, as the current uptrend continues and even accelerates, Micron Technology, Inc. is expected to continue outperforming the market in the short and medium term. Over the next few quarters, capacity expansion will gradually increase revenue and net profit, even though the extremely high prices may fall back and the utilization rates of new fabs will cause gross margins to fall back from the anticipated level of over 80% in the next quarter. In the long term, Micron Technology, Inc. is expected to eventually become a victim of the next downturn cycle, as AI, like all previous long-term technological trends, will eventually enter a cyclical phase. This turning point will not come in the short term, but holding onto this stock means always being highly vigilant for the next shock. But for now, Micron Technology, Inc. is still favored at the current price, and it is expected that the stock price will continue to rise as strong operational performance continues to be released and the tension in the Middle East eases.