Bernstein: Memory shortage will persist until 2028, gives Micron (MU.US) a price target of $1,300.

The top player in the memory price-upcycle cycle delivered a report card of "revenue far exceeding expectations, margins slightly lagging." On October 1, Bernstein analyst Mark Li's team published a quick take on Micron's (MU.US) fiscal 2026 fourth quarter (ended August 2026) results, maintaining an "Outperform" rating and a $1,300 price target. The core judgment of this quick take is: Micron has turned more optimistic on the cycle, expecting supply in calendar years 2027 and 2028 to be "much tighter" than in 2026, and despite capacity additions, the company currently sees no end to the shortage as customers keep coming forward with new demand. Revenue rose more than 30% quarter-over-quarter last quarter, with NAND price increases as the main engine Micron's fiscal fourth-quarter revenue was $54.229 billion, up 30.8% quarter-over-quarter, 6.0% above Bernstein's estimate and 5.3% above the 28-day consensus; GAAP gross margin was 86.8%, GAAP EPS was $32.87 and Non-GAAP EPS was $33.42, 4.3% and 5.5% above estimates, respectively. The standout part of this result was NAND: ASP (average selling price) for that business rose about 30% quarter-over-quarter, far exceeding Bernstein's original forecast of 18.0%, with bit shipments up about 10% quarter-over-quarter; DRAM ASP also posted a "high-teens" quarter-over-quarter increase, above the estimated 17.8%. However, the operating margin did not look good: the 80.7% operating margin was 2.3 percentage points below Bernstein's estimate, and the reason was not on the demand side but rather employee incentive compensation pushing up operating expensesthis bonus squeezed profits on both ends, in fourth-quarter operating expenses and in the new quarter's cost of goods sold. Guidance again beat expectations, but gross margin once again "gave way" to bonuses Management's revenue guidance for fiscal 2027 first quarter (September-November 2026) was $60 billion to $63 billion, implying 11%-16% quarter-over-quarter growthnot only above Bernstein's estimate of $58.065 billion (the guidance range was 3%-8% above it), but also 8%-13% above the 28-day consensus of $55.789 billion, meaning ASP increases are still continuing. GAAP EPS guidance range was $36.84-$38.84, 3%-9% above Bernstein's estimate. But gross margin guidance was again soft: about 86.0%, roughly 1 percentage point below both Bernstein's estimate of 87.2% and the consensus of 87.0%, with the same incentive bonus weighing on cost of goods sold. Bernstein's judgment in the report was: this cost headwind will diminish later, and Micron expects modest price increases to drive higher gross margins for the remainder of fiscal 2027 after the first quarter. More optimistic supply view: net capital expenditure raised again to more than $50 billion The most weighty judgment in the report concerns supply and demand. Micron has turned more bullish on this cycle, expecting supply in calendar years 2027 and 2028 to be "much tighter" than in 2026. Despite capacity additions, the company currently sees no end to the shortage as customers keep coming forward with new demand. To catch up with demand, Micron further raised its fiscal 2027 net capital expenditure guidance to more than $50 billion, with about $25 billion in the first half and more in the second half; most of the increase is to pull forward cleanroom construction progress for the end of calendar 2028 and beyond. It should be noted that Bernstein's own financial model estimates fiscal 2027 capital expenditure at $45 billionthis is the investment bank's estimate, a different measure from the company's guidance of "more than $50 billion." 26 SCAs lock up 75% of output, but deposits cover only 20% Micron disclosed that it has signed 26 Strategic Customer Agreements (SCAs) to date, and management estimates these agreements cover more than 35% of revenue through 2030, and believes this proportion will rise to about 50% in the future. The agreement terms fall into two categories: about three-quarters of SCA revenue has a clear pricing framework, most of which include price bands with floors and ceilings; the remaining quarter is periodically renegotiated at market prices. Customers are also asking for supply locks beyond 2030Micron has signed SCAs extending to 2031 and added one-year extensions to two agreements; any new SCA negotiations involving pricing are being reached at higher prices based on current market conditions and outlook. Including purchase orders from non-SCA customers as well, more than 75% of Micron's fiscal 2027 output is already locked up "today." Customer financial commitments rose to $32 billion, the vast majority of which are cash deposits. But Bernstein left a sober footnote in this report: the $32 billion in financial commitments amount to only about 20% of roughly $150 billion in remaining performance obligations (RPO). The report therefore said "we remain skeptical about the enforceability of the SCAs," and believes Micron's future earnings still depend to a large extent on the continuation of the shortagein other words, in a worst-case scenario, those commitments without deposits may not hold. HBM is more expensive, but still less profitable than conventional DRAM; capital returns provide support On HBM (high-bandwidth memory), HBM supply agreements for calendar 2027 are basically finalized, at significantly higher prices. Micron said this will narrow the margin gap between HBM and conventional DRAMimplying that although HBM prices are rising, its profitability still trails conventional memory. Consistent with Bernstein's model, Micron also expects HBM bit shipment growth to continue outpacing overall DRAM through 2028. Segment data corroborates this margin gap: in the fourth quarter, the Cloud Memory business's gross margin lagged other businesses, which Bernstein interpreted as "likely because HBM margins are lower than conventional memory"; meanwhile, the Core Data Center business's revenue share rose to 33%, versus only 14% a year earlier, highlighting the dominance of AI demand. Another support for the stock comes from capital returns. Micron reiterated that it will return all excess cash above its target cash level to shareholders and will increase buybacks after December 9; the target cash level is expected to be reached by the end of fiscal 2027 first quarter. Bernstein cited consensus expectations that from then until the end of fiscal 2028, Micron is expected to generate $250 billion to $300 billion in free cash flowif all cash above the target level is returned, that corresponds to a 21%-25% "yield." The report believes this is enough to support the share price. Valuation: after rising more than 270% year-to-date, the investment bank still sees about 20% upside Bernstein maintained Micron's "Outperform" rating and $1,300 price target, with valuation anchored at 7.6x one-year forward P/E. Its model forecasts Micron fiscal 2026 (ended August 2026) revenue of $130.099 billion and adjusted EPS of $73.78; fiscal 2027 revenue of $273.341 billion and adjusted EPS of $173.33corresponding to a fiscal 2027 forward P/E of only 6.1x. At the market level, Micron's market capitalization is about $1.2 trillion; it has risen about 270% year-to-date, while the S&P 500 rose only 12% over the same period; the 52-week range is $165.50 to $1,255.00. The report's conclusion can be summed up in one sentence: overall, the expectation that calendar 2028 will still be in shortage is the most positive factormaintain Outperform.