While Micron’s earnings and guidance last night were undeniably impressive—with revenue growth accelerating sharply in the +300% and gross margins approaching 90%—the most important takeaway, in our view, was the company’s expanded disclosure around its Strategic Customer Agreements (SCAs).
These long-term agreements between memory manufacturers and hyperscalers, AI chip designers, and other large customers have emerged as one of the defining structural shifts in the memory industry. As the world’s largest AI companies race to secure High Bandwidth Memory (HBM) supply years in advance, access to future capacity has become a strategic imperative. Failing to secure sufficient HBM could mean surrendering competitive positioning in the AI arms race. As a result, HBM scarcity, advanced packaging bottlenecks, and long-duration customer commitments are collectively creating something the memory industry has rarely enjoyed in previous decades: structural leverage.
Typically spanning three to five years, these agreements are increasingly backed by upfront cash deposits, minimum purchase commitments, and contractual terms that are effectively non-cancellable. In other words, customers are no longer merely placing orders; they are reserving future production capacity.
Micron disclosed that it has now signed 16 SCAs, generally with five-year durations, although automotive customers tend to commit for shorter periods of around three years. Collectively, these agreements cover approximately 20% of the company’s DRAM volume and 33% of its NAND volume through 2030. Management indicated that it is targeting more than 50% of revenue to eventually be covered by such agreements.
Importantly, these contracts incorporate both floor and ceiling pricing mechanisms. While the ceiling component may limit upside during periods of extreme memory shortages, the floor pricing is arguably the more significant feature. According to Micron, these floors are structured to support gross margins “well above” prior cycle peaks, suggesting that profitability could remain structurally elevated through the remainder of the decade rather than reverting to historical trough levels.
Another notable aspect is the financial commitment underpinning these agreements. Micron reported approximately $22 billion of customer commitments and cash deposits tied to existing SCAs, a figure that could rise substantially as additional contracts are signed. We believe total commitments could ultimately approach $40-50 billion over time. While customers will get their deposits back as they perform under the contract, the mechanism also serves as a “break fee”, creating meaningful disincentives for customers to walk away from their commitments.
From an investment perspective, the implications are profound. These locked-in revenue streams materially reduce earnings volatility and provide a degree of forward visibility that the memory industry has historically lacked. Instead of expanding capacity based on speculative assumptions regarding PC, smartphone, or enterprise demand cycles, memory makers can increasingly invest against contracted demand and committed customer spending.
Against this backdrop, we continue to view the valuations of Micron and its peers as highly compelling, at roughly 6-7x 2027 earnings. For decades, memory was viewed as one of the most cyclical segments of semiconductors, characterized by severe boom-and-bust cycles, limited differentiation, and highly volatile profitability, justifying P/E below 10x. However, if SCAs continue to gain traction and a meaningful share of industry output becomes governed by long-term contractual arrangements, the business model transformation would justify a significant rerating.
