Micron's Customers Are Putting Up $22 Billion, and Its CEO Says Data Centers Want 50% More Memory Than It Can Ship
I'm LongbridgeAI, I can summarize articles.Micron CEO Sanjay Mehrotra announced that customers have provided $22 billion in upfront deposits under 16 strategic agreements, with total contracted revenue reaching approximately $100 billion. Driven by AI demand, data centers seek 50% more memory than Micron can currently supply. These take-or-pay contracts feature price floors and ceilings, aiming to protect margins against cyclical downturns while supply remains tight through 2027.
Micron Technology's (MU -5.61%) CEO, Sanjay Mehrotra, sat down with CNBC's Jim Cramer last week at a construction site in Boise, Idaho, where the memory specialist is building two chip fabrication plants.
He had a lot to talk about: Micron's fiscal third-quarter revenue more than quadrupled year over year to $41.5 billion, and net income hit $28.2 billion, compared with $1.9 billion a year earlier. Guidance points to about $50 billion this quarter.
But the number I keep coming back to wasn't in any earnings release. It's the money customers are putting up upfront -- $22 billion in deposits and related commitments under the first 16 agreements.
"All our customers across our end markets will buy everything that we make," Mehrotra said. And data center customers, he added, want about 50% more supply than Micron can commit to delivering.
The driver, of course, is artificial intelligence (AI). Data centers built for it need enormous amounts of memory, and the industry can't manufacture enough.
But what do the contracts require both sides to do -- and what happens if prices fall?
Image source: Micron.
Binding, both ways
Along with its fiscal third-quarter report in late June (the period ended May 28), Micron said it had signed 16 strategic agreements with data center, consumer, and automotive customers. And Mehrotra told Cramer the company has signed more since then.
They are take-or-pay contracts: the customer commits to buying specific volumes of memory over the term and pays for them, whether they end up wanting them or not. Most last five years -- from calendar year 2026 through late 2030, and automotive agreements generally last three. Fourteen of the first 16 add up to a combined minimum of about $100 billion in contracted revenue. That number assumes minimum volumes and prices, and management expects actual revenue to come in well above that.
Floors and ceilings
The biggest contracts set a price ceiling for existing products around where memory was trading in the second calendar quarter of 2026, as well as a price floor that holds throughout the term. Micron says that even at the floor, these agreements would produce gross margins "well above our peak quarterly margins in any past cycle."
That claim carries weight against the sector's last downturn. In fiscal 2023, Micron's revenue fell by about half, to $15.5 billion, and the company lost $5.8 billion.
In this cycle, the gross margin hit 84.6% in the fiscal third quarter, compared with 74.4% in the prior quarter and 37.7% a year earlier, and guidance points to around 86% this quarter.
If memory prices fall, the contracted volumes are still bought -- or paid for anyway. After all, selling in a collapsing spot market is what generated that $5.8 billion annual loss, and the contracts exist to keep Micron out of that position.
But the coverage has limits. The 16 signed agreements represent about 20% of Micron's DRAM volume and around a third of its NAND volume (its two main memory chip categories) over the period. Management expects half or more of revenue to fall under these agreements once the full list is signed. Most of the business, for now, still depends on the open market.
Supply remains tight well into 2028
But could a wave of new factories flood the market before the contracts prove their worth?
Not soon, according to Mehrotra, who expects 2027 to be even tighter than this year.
Micron's own construction calendar explains why. The first Boise factory isn't expected to produce wafers until mid-calendar year 2027, and the second will follow in late calendar year 2028. The New York site, where Micron broke ground in January, arrives even later. And the company expects industry DRAM and NAND supply to remain tight beyond calendar year 2027.
In short, that demand runs into significant new supply only well into the contracts' window.
NASDAQ: MU
Key Data Points
Then there's the stock's price. The growth stock, near $967 as of this writing, has more than tripled in 2026.
Even so, it trades at about 22 times earnings, and about 6 times next year's earnings. A price like that says the market expects these profits to contract.
Ultimately, these agreements help address some of the concerns about how the company can mitigate the risks of a cyclical downturn. Additionally, it stands to reason that customers with $22 billion on the table expect the shortage to last.
But a fifth of DRAM volume under contract is a start, not a transformation. Until more of the business moves to similarly contracted sales, some of the market's caution seems fair to me.