Micron Delivers, but Will It Help the Broader AI Trade?
Profits for Micron mean more spending and tighter margins by everyone else.
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A rebound in technology stocks on Wednesday morning didn’t last long. Investors grew nervous about the sector as they awaited the Micron (MU) earnings report and stocks weakened all afternoon.
There was some good rotational action into retail, drugs, biotech and a few other areas that kept breadth close to even but poor sentiment in the AI sector has cast a pall over the broader market.
Micron Delivers Big Numbers
As expected Micron is posting solid beats with EPS of $25.11 vs $20.83 consensus and revenues of $41.46 billion vs $35.85 billion consensus. Guidance is strong for Q4 with EPS at $30.00 to $32.00 vs $25.72 consensus and revenues at $49 billion to $51 billion vs $43.58 billion consensus.
The stock is up big on the report initially but will it be good enough to trigger a resumption of momentum and help the entire AI sector?
Why a Beat May Not Be Enough
The biggest problem for the market is that profits for Micron mean more infrastructure spending and more debt for the rest of the AI group. The demand for chips is obviously strong but that doesn’t translate into profits for those companies that must buy them. The chip buying is driven by the need to maintain a competitive edge and it also means that margins will be tighter. What’s good for Micron and semiconductors isn’t necessarily good for hyperscalers, data centers, and AI developers.
We’ll see how this plays out. There is some relief buying in Micron on those impressive numbers but will it be a catalyst for a turn in the Mag 7 names that have been in a downtrend since the end of May?
My Game Plan
My game plan remains largely the same. My cash levels are around 47%, I’ve cut lagging names aggressively, and I’m selective with new buys. I’m not interested in trying to catch bounces in technology stocks that are struggling and am focusing on biotechnology names with relative strength.
My accounts are sitting near new highs for the year and my goal is to keep them that way with minimal drawdowns. I’m focused on strong defense while playing some selective offense. Superior returns are typically produced by outperforming in downtrends rather than outperforming in uptrends. There is always going to be a new opportunity to make money but if you don’t protect gains then you can’t compound returns.
I don’t feel any compulsion to jump into the battle over AI and technology right now. The easy money has been made in those groups, and it is going to be much tougher moving ahead.
Have a good evening. I’ll see you Thursday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
