PM image
We are downgrading Micron Technologies (NASDAQ:MU) to Hold. Simply put, we believe DRAM and NAND price recovery is priced into 2024. MU's outperformance is closely tied to the dynamics of memory market demand and supply. The company derives 69% of its total revenue from DRAM and 30% from NAND. MU shares have risen 80% from $55 per share to a 52-week high of $157 per share and are currently trading at around $102. We are now updating our view on the stock as we believe the market has digested this year's DRAM and NAND spot price recovery and demand positives relative to 2023.
Last year, DRAM and NAND prices fell sharply due to oversupply caused by sluggish end demand after the pandemic. The following report from last year captures just how bad the memory price decline was: “DRAM prices have fallen 57% since Q3 2021 (from $0.54 to $0.30 in Q1 2023), while NAND prices have fallen 55% over the same period.” This decline began to ease in the second half of 2023. This is when we pushed our bullish view on the stock and MU's management raised its outlook for Q1 2024. And indeed, this year DRAM and NAND prices are recovering. Taiwan's TrendForce reported in late July that “DRAM and NAND Flash revenues are expected to grow significantly by 75% and 77%, respectively, in 2024.” The upside this year comes from a recovery from last year's lows, driven by 1. improving memory supply and demand dynamics (prices will rise from early November 2023 due to tighter supply and production management by memory manufacturers) and 2. rising demand for high-bandwidth memory or HBM due to the value and use of AI. We believe these two factors will continue to have an impact, but the market has already priced in the upside. Therefore, we do not see a favorable risk/reward profile for this stock heading into the end of the year.
The chart below compares MU's stock price performance over the past six months to the S&P 500. The stock has clearly outperformed the S&P 500 benchmark, but since early July, that outperformance has been significantly tempered by investors reducing positions due to a broader semi-pullback, as well as their reaction to the decline in DRAM and NAND spot prices. For reference, spot price refers to the “current price in a market where a particular asset, such as a security, commodity, or currency, can be bought or sold for immediate delivery.” DRAM and NAND spot prices are also often used as leading indicators of the trajectory of the memory market, especially demand. While spot prices have stabilized, we believe we are not in a period of rapid growth/recovery due to sluggish end demand in the core end markets (PCs and smartphones). This year should set the stage for a good environment going into 2025, but we do not expect to see significant outperformance in the second half of 2024.
Y Chart
We expect to see a strong upswing in MU in 2025, driven primarily by a healthier demand environment in terms of units for PCs, smartphones and AI servers. We specifically mention unit volume recovery across these markets here due to MU's particular reliance on these markets (see chart in Q3 '24 earnings presentation) and concerns about quarterly growth momentum at the end of the year.
Micron Technology Revenues
Wall Street Ratings and Reputation
MU stock is cheap, but the risk/reward balance is poor in the near term given that the positive factors are already priced into the stock. On a P/E basis, the stock is trading at 26.0x C2024, compared to 34.1x for its peers. The stock is trading at 4.0x EV/C2024 Sales, well below its peers' average of 7.7x. While MU is attractive to long-term investors, we do not believe the stock will outperform in the near term given that 1. the positive factors mentioned above are priced into the stock, and 2. there is no near-term catalyst to speed up the recovery in final demand and spark a new wave of investor confidence.
The following chart compares MU's rating to the average of its peer group.
TechStock Pro
Wall Street sentiment towards the stock has not changed much this quarter, with the majority of sell-side analysts recommending it as a buy. Of the 37 analysts covering the stock, 35 have a buy recommendation, while the rest have a hold recommendation. Sell-side price targets for the stock are similarly positive, with a median target price set at $161 and an average at $172, suggesting an upside potential of 57-67%. As it is unlikely that MU will achieve this upside in the next quarter, investors are advised to remain on the sidelines for now. The following chart shows the sell-side ratings and price targets for MU stock.
TechStock Pro
What to do with inventory?
MU remains one of our top memory picks, but we don't think it will be favored at the end of the year. Our view on MU revolves around the question “what is priced into the price?” Given the potential DRAM demand that could come from HBM demand for AI servers and AI PCs that require more DRAM content earlier in the manufacturing process, we believe the market is still pricing MU as if it were the 8th or 9th, even though it is the 6th. We don't expect the stock to perform well in the second half of 2024, but we are more optimistic about 2025. Next year, we expect two things to happen. First, PC and smartphone end demand will recover, and for the former, more favorable interest rates will be a catalyst, coupled with AI PCs. Second, increased capital spending focused on HBM supply and everything under that umbrella will support demand growth. Management now expects “significant improvement in profitability in FY25, with FY25 average quarterly capex significantly higher than $3.0 billion in Q4'24.” We believe MU will become more attractive towards the end of the year and would recommend investors be patient during that period once the market has digested a potential lull following a short-term upswing.
