Bernstein: Storage shortages will continue until 2028, with a target price of $1,300 for Micron (MU.US)

The Zhitong Finance App learned that the leading players in the storage price increase cycle handed over a report card of “excessive revenue and slightly poor profit margins.” On October 1, Bernstein (Bernstein) analyst Mark Li's team released a quick review of Micron (MU.US)'s performance for the fourth quarter of fiscal year 2026 (ending August 2026), maintaining the “outperforming market” rating and a target price of $1,300. The core judgment of this quick review is that Micron is more optimistic about the cycle trend. It predicts that supply will be “much tighter” in 2027 and 2028 than in 2026, and despite increasing production capacity, the company cannot currently see when the shortage will end due to continuous new demands from customers.

Last quarter's revenue increased by more than 30% month-on-month. NAND price increases were the main engine

Micron's revenue for the fourth fiscal quarter was $54.229 billion, up 30.8% month-on-month, 6.0% higher than Bernstein's estimate and 5.3% higher than the 28-day consensus forecast; GAAP gross margin was 86.8%, GAAP earnings per share of 32.87 dollars, and non-GAAP earnings per share of 33.42 dollars, which were 4.3% and 5.5% higher than estimates, respectively. The most impressive part of this performance was in NAND: the ASP (average selling price) of the business rose by about 30% month-on-month, far exceeding Bernstein's original forecast of 18.0%, and bit shipments increased by about 10% month-on-month; DRAM's ASP also recorded a “high” increase of about ten percent month-on-month, higher than the estimated 17.8%.

However, the operating profit margin was not good: the operating profit margin of 80.7% was 2.3 percentage points lower than Bernstein's estimate. The reason was not on the demand side, but employee incentive pay drove up operating expenses — this bonus also squeezed profits in both operating expenses in the fourth quarter and sales costs in the new quarter.

The guidelines once again exceeded expectations, but gross margin once again “gave way” to bonuses

Management's revenue guidance for the first quarter of fiscal year 2027 (September-November 2026) was between $60 billion and $63 billion, implied a month-on-month increase of 11%-16% — not only higher than Bernstein's estimate of $58.065 billion (the guidance range was 3%-8% higher), but also higher than the 28-day consensus forecast of US$55.789 billion by 8%-13%, meaning that ASP's upward trend continues. The GAAP earnings per share guidance range of $36.84-38.84 was higher than Bernstein's estimate of 3%-9%.

However, the gross margin guide is once again weak: about 86.0%, which is about 1 percentage point lower than Bernstein's estimate of 87.2% and the consensus estimate of 87.0%. It is still the same incentive bonus on the cost of sales side. Bernstein's judgment in the report is that this cost headwind will be reduced in the future, and Micron expects that moderate price increases will drive a higher gross profit margin for the rest of the 2027 fiscal year after the first quarter.

Supply judgments are more optimistic: net capital expenditure has been raised to more than $50 billion

The most powerful judgment in the report is supply and demand. Micron turned more optimistic about the current cycle and expects supply in the 2027 and 2028 natural years to be “much tighter” than 2026. Despite the increase in production capacity, the company currently cannot see when the shortage will end due to new demands from customers.

To catch up with demand, Micron further raised its FY2027 net capital expenditure guidance to over $50 billion, of which about $25 billion in the first half of the year and more in the second half; most of the increase was to advance the progress of cleanroom construction at and after the end of the natural year 2028. What needs to be distinguished is that Bernstein's own financial model estimates capital expenditure for fiscal year 2027 at $45 billion — this is an investment estimate, and the “over 50 billion” of the company's guidelines is two calibers.

26 SCAs locked in 70% of output, but the deposit only covered 20%

Micron revealed that 26 Strategic Customer Agreements (SCA) have been signed so far, and management estimates that these agreements cover more than 35% of revenue up to 2030, and believes this ratio will rise to about 50% in the future. The terms of the agreement fall into two categories: about three-quarters of SCA revenue has a clear pricing framework, most of which have price bands with upper and lower limits; the remaining quarter is regularly renegotiated according to market prices. The customer is also asking for a lock in after 2030 — Micron has signed the SCA extended to 2031 and added a one-year extension to the two agreements; any new SCA negotiations involving pricing are concluded at a higher price based on current market conditions and prospects.

Including purchase orders from non-SCA customers, more than 75% of Micron's FY2027 output “today” is already locked in. Clients' financial commitments rose to $32 billion, the vast majority of which were cash deposits.

But Bernstein left a sobering footnote in the report: the $32 billion financial commitment is only about 20% of the remaining performance obligation (RPO) of approximately $150 billion. As a result, the report stated that “we still doubt the enforceability of SCA,” and believes that Micron's future profits will still largely depend on continuing shortages — in other words, promises without a deposit may not be kept in the worst case scenario.

HBM is more expensive, but still less profitable than regular DRAM; capital return underpins

In terms of HBM (high bandwidth memory), the HBM supply agreement for 2027 has basically been finalized, and the price is significantly higher. Micron says this will narrow the margin gap between HBM and conventional DRAM — implying that, despite the price increase, HBM is still less profitable than conventional memory. Consistent with Bernstein's model, Micron also expects HBM to continue to grow faster than DRAM overall by 2028. Segment data supports this margin gap: the gross margin of the Cloud Memory (Cloud Memory) business lags behind other businesses in the fourth fiscal quarter, which Bernstein interpreted as “probably because HBM's profit margin was lower than conventional memory”; at the same time, the share of Core Data Center (Core Data Center) business revenue rose to 33%, compared to only 14% a year ago, highlighting the dominant position of AI demand.

Another source of support for stock prices comes from capital returns. Micron reiterated that it will return all excess cash above the target cash level to shareholders and will increase repurchases after December 9; the target cash level is expected to be reached by the end of the first quarter of fiscal year 2027. Citing consensus estimates, Bernstein said that from then until the end of fiscal year 2028, Micron is expected to generate between $250 billion and $300 billion in free cash flow — corresponding to a 21%-25% “yield” if all cash beyond the target level is returned. According to the report, this is enough to support the stock price.

Valuation: After rising more than 270% since the beginning of the year, investment banks still give about 20% upside

Bernstein maintained Micron's “outperforming the market” rating and a target price of $1,300, and the valuation was anchored at 7.6 times the one-year forward-looking price-earnings ratio. Its model predicts revenue of $130.099 billion and adjusted earnings per share for fiscal year 2026 (ending August 2026); revenue of $273.341 billion and adjusted earnings per share of $173.33 billion for fiscal year 2027 — corresponding only 6.1 times the projected price-earnings ratio for fiscal year 2027.

At the market level, Micron's market value is about 1.2 trillion US dollars; the cumulative increase since the beginning of the year was about 270%, and the S&P 500 index rose only 12% during the same period; the 52-week range was 165.50 to $1,255.00. The report's conclusion can be summed up in one sentence: Overall, the 2028 natural year is expected to remain in short supply, which is the most positive factor — maintaining an outperforming market.