Micron's strategic contracts secure a $220 billion deposit, a $1 trillion revenue floor, and record margins.

Original author: Long Yue

Source: Wall Street Journal

Customers first put up $22 billion in deposits, signed non-cancelable long-term contracts, and accepted a pricing framework far more favorable to Micron than at any point in its history—these are the core terms of Micron’s latest batch of Strategic Customer Agreements (SCAs).

According to Zhui Feng Trading Desk, on June 25, Barclays, Morgan Stanley, and JPMorgan collectively regarded it as a "game-changing" agreement. JPMorgan semiconductor analyst Harlan Sur, in a research report, characterized this batch of SCA as a "fundamental shift" in Micron's business model—from a cyclical commodity supplier to a long-term supplier with multi-year contract protections and significant downside hedging for revenue and profits.

The value of these contracts lies in four aspects: first, the scale is substantial, covering approximately 20% of DRAM volume and about one-third of NAND volume; second, pricing and volume are linked—based on the minimum committed volumes and prices across the 14 agreements, the total minimum revenue amounts to approximately $100 billion; third, customers are required to provide a combined $22 billion in deposits and financial commitments; fourth, the gross margin corresponding to the contract price floor is “significantly higher than historical peaks” (historical peak around 62%), effectively securing Micron a higher profit floor.

Micron has disclosed that it has signed 16 SCAs, with customers across the data center, consumer electronics, and automotive markets.

In terms of customer distribution, there are four large customers (widely speculated to include hyperscale cloud providers and major consumer electronics OEMs), three medium-sized customers, and nine smaller customers in the automotive industry.

Contract terms: Data center and consumer electronics contracts are five-year terms covering 2026 to 2030; automotive contracts are three-year terms.

Coverage scale: These 16 agreements collectively cover approximately 20% of Micron's DRAM shipments and about one-third of its NAND shipments.

According to Barclays' research report, management stated that once all planned SCA agreements are fully signed, more than 50% of the company's revenue is expected to come from these agreements, with fixed-price or price-range agreements anticipated to account for approximately 40% of the company's revenue.

Under 16 signed agreements, Micron will receive approximately $22 billion in cash deposits and other financial commitments—$18 billion in unrestricted cash and $4 billion in letters of credit.

These funds are held by Micron and remain on the balance sheet during the contract term; they are returned to clients upon expiration, with a "back-end weighted" repayment schedule, meaning the majority is repaid in the second half of the agreement.

This money should not be simply viewed as prepaid revenue. Its true purpose is to increase the cost of customer cancellation.

Regarding the enforceability of the contracts, Morgan Stanley's research report directly quoted management's statement on the earnings call: “These contracts are non-cancelable.” If customers fail to take delivery at the agreed volume and price, Micron can act on the deposit. For Micron, this effectively serves as a deposit securing a portion of its demand over the coming years; for customers, it represents a binding cost paid for supply certainty.

This also explains why customers are willing to accept price ranges and deposit arrangements. When storage supply is tight, driven by demand for AI servers, data center SSDs, HBM, and high-end terminals, locking in volume itself holds value.

SCA's pricing framework consists of three categories: fixed price, a price range with upper and lower limits, or a reference to market price with fluctuations within a similar range.

Price cap section: For existing products, the price cap is based on market prices in the second quarter of 2026. This provision has been interpreted by some market participants as Micron "actively locking in price increases," sparking some disagreement.

But the real highlight is the price floor: the gross margin corresponding to the floor price is "far higher than the profit peak of any previous cycle." Micron's historical gross margin peak was approximately 62%, while the current gross margin has reached 84.9%—meaning that even if the floor price clause is triggered, Micron's profitability still far exceeds its best historical performance.

But SCA is not a contract with “price always upward.” Some existing products have price caps anchored to the market price in Q2 2026. In other words, Micron has traded part of its future price upside for greater revenue certainty and a floor on gross margin.

Analyst Joseph Moore commented: "The contract price cap being flat with Q2 prices" has indeed raised some concerns about the company "locking in a ceiling," but he also noted that gross margins are approaching 90% and are likely to remain in this range for a considerable period—it is reasonable for counterparties to seek some protection in negotiations, and the contract duration is the key dimension for evaluating its value.

Of the 16 agreements, 14 have clearly defined price terms.

According to Barclays and JPMorgan research reports, the combined remaining performance obligations (RPO), calculated based on minimum committed volumes and prices, for these 14 agreements total approximately $100 billion.

Management has clearly stated that actual revenue is expected to be "significantly higher" than this floor—since the $100 billion is merely a minimum baseline calculated at the floor price; if market prices rise above the floor, revenue will naturally increase accordingly.

For new products, the protocol also retains additional upside pricing potential.

Locking demand does not equal automatic delivery.

Micron raised its FY26 net capital expenditure guidance to approximately $27 billion, up from approximately $25 billion. FY27 quarterly capital expenditures are expected to exceed FQ4 levels, with more than half of the year-over-year increase coming from construction-related capital spending to preemptively expand cleanroom capacity.

This indicates that SCA brings not a light-asset model, but a more certain rationale for capacity expansion.

Customers are willing to commit capital, and Micron will also invest. Long-term agreements provide a stronger basis for capacity expansion, but if future demand or prices deviate, capacity deployment will still remain a cyclical variable.

All three institutions raised Micron's target price, but the rationale goes beyond just the better-than-expected Q1 results.

Barclays (researcher Tom O'Malley): Target price raised from $1,175 to $2,000, based on a 12x multiple of CY27 EPS of $166.74. The report states that SCA details "exceeded expectations" and views these protocols as "substantially positive for downside protection," while noting that supply-demand imbalances will not ease in the short term, leaving room for further upside.

Morgan Stanley (analyst Joseph Moore): Target price raised from $1,050 to $1,200, based on 30x cyclically adjusted earnings per share ($40). The report raised its cyclically adjusted earnings estimate from $35 to $40, citing that earnings run rates are now approaching $200 per share.

JPMorgan (analyst Harlan Sur): Target price大幅上调 from $550 (December 2026 target) to $1,540 (December 2027 target), based on 10x FY28 EPS of $154 (10-year median P/E). The report characterizes SCA expansion as a "step change," believing it fundamentally alters Micron's business model characteristics.

The key variable behind these model changes is profit sustainability.

Micron's quarterly revenue reached $41.456 billion in May, a 73.7% sequential increase; the midpoint of its guidance for the August quarter is $50 billion in revenue and $31 in non-GAAP EPS. While these quarterly figures are already high, SCA has posed another question to the market: if prices no longer rise rapidly, can Micron sustain its high gross margins and high free cash flow?

The current framework's answer is: Some income has stronger protection, but not all income. Price caps, future capacity expansion, and the sustainability of AI demand remain boundary conditions.

SCA also brings a balance sheet change: deposits will go to Micron, and although they will eventually be returned to customers, they will temporarily increase cash holdings.

As of the end of May, Micron had approximately $26 billion in cash and investments; operating cash flow for the quarter was $25.4 billion, and adjusted free cash flow was $18.3 billion. In August, the company also expects to receive approximately $10 billion in customer cash deposits.

The path to capital returns is also becoming clearer. Restrictions under the U.S. CHIPS Act have constrained Micron’s near-term repurchase capacity; after December 9, 2026, as the restriction window closes, the company intends to gradually return 100% of excess cash to shareholders, with buybacks being the primary method.

This is not a direct revenue contribution to SCA, but another side of how SCA is shifting the market narrative: if high profits are sustained and cash accumulates rapidly, Micron may no longer just be “making money from cycles,” but could enter a more stable cash return framework.

Beyond SCA, Micron's fiscal Q3 2026 earnings data was also strong:

• Revenue of $41.456 billion, up 73.7% sequentially, significantly exceeding the market expectation of $35.6 billion
• DRAM revenue: $31.3 billion (up 67% quarter-over-quarter), NAND revenue: $9.9 billion (up 99% quarter-over-quarter)
• DRAM average prices rose by approximately 60% month-over-month, while NAND average prices increased by about 80% mid-range.
• Gross profit margin reached 84.9%, a record high, exceeding market expectations of approximately 81.8%-81.9%.
• Earnings per share of $25.11–$25.12, significantly exceeding the market expectation of approximately $20.49

Guidance for the August quarter (FY4Q26):

• Revenue guidance of $50 billion (midpoint), above the market expectation of approximately $43.1–43.6 billion
• Gross profit margin guidance is approximately 86%, continuing to exceed market expectations.
• Earnings per share guidance of $31.00 (midpoint), above the market expectation of approximately $25.31–25.72