Will Micron Soar on Wednesday? Watch These 3 Things When It Reports Earnings

Micron (NASDAQ: MU) has been one of the biggest winners on the stock market over the past year, thanks to an epic AI-driven shortage of memory chips.

As a result, memory stocks have soared across the board, with Micron gaining 767% in a year. The stock even topped $1 trillion in market cap along the way, as have the two other South Korean memory giants, SK Hynix and Samsung.

The memory chip market has historically been highly cyclical, and Micron's recent gains haven't come without sharp pullbacks. In fact, the stock was down 13% on Tuesday, following the slide in its South Korean peers on fears about leveraged ETFs based on Samsung and SK Hynix.

Micron will report fiscal third-quarter earnings on Wednesday after hours, and the report comes at a pivotal time in the AI boom as investors are wondering if a peak in memory stocks is near. Option traders are pricing in a move of around 14% on the results, which represents more than $150 billion in market cap.

Given the uncertainty around the trajectory of the memory shortage and the AI boom, a big swing is likely in the stock. Here are three things that will determine where Micron stock goes following the report and in the coming months.

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1. How big will the guidance beat be?

Micron is growing so fast that investors are much more concerned with the next quarter than the one just passed. The consensus for the third quarter, which ended in May, calls for revenue to jump 279% to $35.3 billion, and for adjusted earnings per share to go from $1.91 to $20.28.

Micron has smashed estimates in both its reported quarter and for its guidance in its recent reports, and fourth-quarter guidance will be a key indicator of where the company is headed. For the fourth quarter, analysts currently expect $42.5 billion in revenue and $24.80 in adjusted earnings per share, showing some moderation in sequential growth.

For example, in its second-quarter report, Micron guided to revenue of $33.5 billion and EPS of $18.75-$19.55, which compared to expectations at $22.5 billion in revenue, and $10.57 in EPS. Analysts have adjusted their models, but if the memory chip company can pull something like that off again, the stock could easily go significantly higher.

2. How fast are margins expanding?

Micron's profits are exploding because memory prices have soared due to the shortage. In the second quarter, it reported a gross margin of 74.4%, which was more than double from the year-ago result at 36.8%, and well ahead of the first quarter at 56%.

For the third quarter, the company guided to gross margin of 81%, which would top even Nvidia, and further improvement will be difficult. However, if that number does go higher in Q4 and indicates that pricing dynamics are still improving, it's likely to push the stock higher.

3. How far out is supply booked?

The memory shortage won't last forever, but it could persist for years.

On its last earnings call, management said that tight supply in data center and AI-related memory would last beyond calendar 2026. It also said that for some of its key customers, it's only able to fulfill between 50% and two-thirds of demand in the medium term, indicating that there's still plenty of excess demand.

Keep an ear out for updated commentary on the shortages, as investors are eager to hear that supply will remain tight in the medium term.

Investors should be aware that the memory shortage will be difficult to unwind, as it typically takes years to bring on new supply, and demand for AI chips sees no signs of slowing down. Those factors should favor Micron structurally, though with the stock priced for perfection, a miss on any key metric could send shares sliding.

One note of caution

Micron could soar again after its earnings report on Wednesday, but the higher the stock goes, the more difficult further gains become, as the cyclicality of semiconductors, and memory in particular, is unlikely to change over the long term, despite the AI supercycle.

Stock prices are leading indicators, so Micron's share price will peak before its profits, though that peak may be years away.

For investors who have already made significant gains on Micron, pocketing some profits seems reasonable at this point, especially with its market cap now above $1 trillion.

Jeremy Bowman has positions in Micron Technology and Nvidia. The Motley Fool has positions in and recommends Micron Technology and Nvidia. The Motley Fool has a disclosure policy.