Micron's take-or-pay contracts cover 35% of sales, but buyers are cutting memory per chip to survive
Micron's management says take-or-pay contracts lock a floor under the boom. The buyers who signed those contracts are cutting memory per chip to survive it, and the market is pricing the end of the cycle.
Vincent Jiang · 3 min read
On October 29, Bank of America−1.81% — Bank of America, down 1.81 percent today came out of meetings with Micron's−4.93% — Micron, down 4.93 percent today COO, CTO and CFO and published what management said, then put a $1,550 price target on a stock trading at $877.55 135. Micron fell 4.98 percent that day and roughly 4 percent more pre-market on October 30, even as SK hynix−7.61% — SK hynix, down 7.61 percent today posted a record $62.8 billion quarter and SanDisk grew revenue 378 percent 135. The market is looking straight at a $150 billion free cash flow forecast and pricing the end of the cycle anyway 135.
The contracts management wants investors to price
Management's pitch is contractual. Supply agreements run three to five years as take-or-pay deals with financial commitments, covering about 35 percent of sales now with a target of 50 percent by 2030, and the pricing framework carries a floor well above prior cycle highs 1.
BofA's Vivek Arya says deals that once ran a year or less now run three to five years 3. Management expects $150 billion to $200 billion of annual free cash flow in calendar 2027 and 2028, holds about $35 billion in buyback authorization, and starts increasing capital returns on December 9 1. Longer contracts, management argues, are what memory deserves as the critical component in AI systems.
The buyers are already rationing
The complication is who signs those contracts. SK hynix says customers are cutting HBM stack heights to stretch supply, and its CFO expects PC and smartphone shipments to fall as memory costs bite 4. Tesla−0.58% — Tesla, down 0.58 percent today cut memory on its AI5 chip in half and on AI6 by a third, calling it the only way to get Optimus volume 34.
On October 30, Intel−28.36% — Intel, down 28.36 percent today fell about 26 percent pre-market after guiding December down on PC weakness, and Micron traded at 8.3 times sales, down from 14.4 in June 256. Micron answered that de-specification reflects shortage, not reduced importance: more memory per dollar means more tokens per dollar 1.
The market prices memory profits as a peak, not a floor
Data
| Value | |
|---|---|
| Micron trailing P/E | 13.1 |
| S&P 500 trailing P/E | 22.6 |
| Micron forward P/E | 5.3 |
| SK hynix forward P/E | 4 |
What December's report has to prove
Both camps agree on the numbers; they disagree on what they mean. The bear case has history: Micron traded at 6.3 times earnings in September 2022, then posted a loss for fiscal 2023 2.
The boom is already in the numbers: revenue up sixfold in a year as margins near 70
- Revenue ($B)
- Net margin (%)
Data
| Revenue ($B) | Net margin (%) | |
|---|---|---|
| Q4 '24 | 8.7 | 21.5 |
| Q1 '25 | 8.1 | 19.7 |
| Q2 '25 | 9.3 | 20.3 |
| Q3 '25 | 11.3 | 28.3 |
| Q4 '25 | 13.6 | 38.4 |
| Q1 '26 | 23.9 | 57.8 |
| Q2 '26 | 41.5 | 68.1 |
| Q3 '26 | 54.2 | 69.5 |
The bull case has a counter the bears cannot dispose of: 14 customers have locked more than half of SK hynix's 2027-28 capacity, and DRAM is effectively sold out through 2029 4. A take-or-pay contract is a floor only if the counterparty can pay. That is the December report's job to test: whether gross margin holds near 86 percent, and whether buyers strained by the memory bill honor the floor they signed 24. The floor is either a floor or a promise, and December says which.
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