Micron expects 40% of revenue under price ceilings by Q2 2026

Micron Technology (MU) expects approximately 40% of its revenue to be subject to fixed prices or ceilings near calendar Q2 2026 market levels once all planned deals are signed. This cap on pricing is significant because higher prices were the primary driver behind the company's record gross margin in fiscal Q3 2026. While these strategic customer agreements typically span five years and include price floors, the ceiling on existing products represents the key constraint for revenue growth.

In fiscal Q3 2026, Micron's DRAM prices increased in the low 60s percentage range from the previous quarter, while bit shipments grew only in the low single digits. DRAM accounted for 76% of total revenue. Consequently, the company's revenue expansion was driven almost entirely by price increases rather than volume growth. This dynamic pushed gross margin to a record 84.9%, a 10 percentage point increase in a single quarter.

The new strategic customer agreements are take-or-pay contracts that bind customers to purchase set volumes, generally from calendar 2026 through the end of calendar 2030. For the largest of these deals, existing products are capped at the calendar Q2 2026 market price, with a floor established below that level. Management stated that this specific price level underpins both the fiscal Q3 results and the guidance for fiscal Q4.

Although the price floor provides protection, management noted that gross margins at this floor level remain well above Micron's peak margins from any previous cycle. The limitation applies to existing products, which cannot see further price increases on the capped portion of revenue. New products, such as newer generations of High Bandwidth Memory (HBM), involve rising bit costs and allow for negotiated price premiums later.

Micron guided fiscal Q4 2026 gross margin to approximately 86%, though these results are still pending. The company indicated that this outlook reflects a meaningful moderation in the rate of price increases. The CFO added that at current margin levels, each additional price rise contributes less to overall gross margin. Thus, while margins are still expected to rise, the pricing lever that drove fiscal Q3 performance is expected to lose force independently of the contractual ceilings.

Micron currently trades at 12.7 times sales, compared to a ten-year range of 1.1 to 14.4. This valuation suggests investors expect current margin levels to persist. The next test for the company will be its fiscal fourth-quarter report, where management says it will show at least $100 billion in committed revenue based on minimum volumes and prices across 14 of the 16 agreements signed to date.

The annual report will also detail how much of that committed revenue lands in the following twelve months, with management expecting actual revenue to exceed those minimums. Investors must weigh the bounded upside from capped prices against the downside protection offered by floors that keep margins above historical peaks.