Micron Technology’s Record-Breaking Quarter
The remarkable quarter was not driven by increased memory volume but rather by higher memory prices, and new contracts have now set limits based on these prices.
Micron Technology (MU) has just reported its best quarter ever, yet its stock remains about 28% below its highest point from the past year, despite having risen more than 600% in that time. This discrepancy isn’t about the demand for memory, which Micron anticipates will exceed supply well into 2027. Instead, it hinges on a specific figure from this impressive quarter and a fixed price agreement that the company has in place.
84.9% Gross Profit Margin Driven by Price, Not Volume
The company’s gross margin for the third quarter of fiscal 2026 reached 84.9% on a non-GAAP basis, marking a significant increase of 10 percentage points from the previous quarter. Micron attributes this rise largely to improved pricing. DRAM prices, which comprise 76% of Micron’s $41.5 billion in revenues for Q3 2026, increased by around 60% from the last quarter, although actual bit shipments only grew in low single digits. In essence, Micron sold less memory but at much higher prices. The operating margin was 81.2%, showing an increase of 54 points year-over-year, reflecting a clear shift in pricing strategies.
Setting Price Limits at Approximately 40% of Revenue
To navigate the cyclical nature of the memory market, Micron has signed 16 strategic customer contracts, often take-or-pay agreements that will be valid for five years starting in 2026. These deals include price ranges for current products, establishing a price floor for the duration and a ceiling linked to the CQ2 market price that contributed to their record performance. Once all agreements are finalized, Micron expects around 40% of its revenue to be secured through fixed-price contracts or contracts at similar price levels. The floor price appears solid, and the management claims that margins at this floor will still surpass the peaks from previous cycles.
Valuation Indicates Optimism on Sustained Profitability
The stock now trades at 10.9 times sales, a level not seen in the past decade, suggesting that investors are confident in the continuation of profitability. Maintaining margins throughout the memory cycle—not just at its peak—is essential to the overall profitability of businesses globally. Notably, Micron’s guidance for its gross margin in Q4 2026 is projected to be around 86%, only a point above the record margin, though the company acknowledges a slowdown in price growth.
Key Metrics for Q4 to Focus On: Bit Shipments, Not Prices
The contracts stipulate binding volume commitments and involve $22 billion in cash deposits, which Micron will utilize for its projects. The primary risk, as indicated, revolves around pricing likely peaking after Q3 of fiscal 2026. Additionally, external supply risks arise, especially with reports that a Chinese company is considering establishing another memory chip manufacturing facility. For investors, a crucial question looms: Is a stock significantly below its peak price undervalued or simply reaching its height? The telling factor might very well be the total units shipped. If we consider estimated fourth-quarter 2026 revenues at around $50 billion, then the specific ceiling starts to lose its importance.
The Record Margin: Time will Tell if It’s Sustainable
Holding the title for the best quarter in company history is impressive, but maintaining effective processes beyond market shifts is vital. This reflects a situation where certain cyclical positions operate simultaneously. Baskets like the Trefis High Quality Portfolio have demonstrated solid performance, consistently outpacing the S&P 500, S&P Mid-cap, and Russell 2000.
