By Wallace Witkowski
Micron Technology Inc. is dealing with an “unprecedented” oversupply problem, but whether it gets worse or better in the near-term is up for debate.
Micron /zigman2/quotes/205710729/composite MU -1.31% shares outperformed the broader Friday despite offering a fiscal first-quarter forecast Thursday afternoon that analysts universally agreed was not good for the memory-chip specialist.
However, analysts had different ideas about when the glut in the memory market could be worked out of the system. The glut developed quickly after two years of global chip shortages brought on by the COVID-19 pandemic that led customers to double- or triple-buy their normal orders, resulting in higher inventories.
While the magnitude of the recovery in the memory market is “likely to be a key debate,” Evercore ISI analyst C.J. Muse said “a bottom is a bottom is a bottom, and we are clearly getting close.” Muse has a $70 target and an outperform rating on Micron.
“Shares are at or near trough but could trade sideways until we have more clarity on the overall cycle,” Muse said. “But for investors with a 12-month plus time horizon, we view shares as extremely attractive.”
Opinion: Micron earnings suggest the chip downturn could be worse than Wall Street expects
Morgan Stanley analyst Joseph Moore had one of the bleakest views, as he called the current chip downturn worse than 2019. He has an underweight stock rating, and reduced his price target to $49 from $56.
“This is worse than 2019 because the reaction to oversupply – which began in August of 2021 – took so long to play out,” Moore said. “Customers continued to build inventory, producers held prices high and allowed inventory to build, and capital spending continued to grow.”
“Of course, the magnitude of the inventory correction is harsher when it’s built for an additional year,” Moore said. “We agree with the company that volume will rebound in the May quarter, but it will likely rebound to levels that remain well below production.”
“We assume that volume recovers through the fiscal year, but expect pricing to remain soft, with cost of sales rising as inventory builds abate later in the year,” Moore noted.
UBS analyst Timothy Arcuri, however, maintained his buy rating, calling out that the glut is not a black-and-white situation, that oversupply exists in pockets of the market, and the parts where demand remains high will compensate.
“The inventory is too high, but the bits are what matters and we remain optimistic on the setup around cloud,” Arcuri said.
The analyst explained that while smartphone and PC softness reduced memory-chip demand, new server chips from Intel Corp. /zigman2/quotes/203649727/composite INTC -1.38% and Advanced Micro Devices Inc. /zigman2/quotes/208144392/composite AMD -2.53% will prompt cloud data centers to buy more memory chips, especially if fabs cut back on chip-making capacity.
Arcuri said cloud customers “have become incredibly sophisticated,” and are “likely going to see the ‘writing on the wall'” as fabricators cut back in wafer-fab equipment purchases, and buy more memory chips.
Micron shares finished Friday up 0.2% at $50.10, exactly where they closed last Friday, after rising as much as 4% during the regular session, compared with 1.5% declines both the S&P 500 index /zigman2/quotes/210599714/realtime SPX -1.96% and the tech-heavy Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -2.27% .
Full earnings coverage: Micron cuts capital spending to stem ‘unprecedented’ oversupply cycle
Cowen analyst Krish Sankar, who has an outperform rating and a $70 price target, said Micron’s guidance “implies significant decline in bit shipments.” With the decline in the fourth quarter, the company that makes the current downturn “the most severe in the company’s history.”
“That said, it’s worth reminding that memory stocks tend to bottom ahead of fundamentals, and lower supply is as important as improved demand,” Sankar said. That assumes that Samsung Electronics Co. /zigman2/quotes/209800866/delayed KR:005930 -0.17% and SK Hynix Inc. /zigman2/quotes/206420319/delayed KR:000660 -1.10% also follow suit in cutting their capacity, otherwise memory prices will only fall lower.
Mizuho analyst Vijay Rakesh, who has a neutral rating and lowered his price target to $52 from $56, said that even a bottom in the May ending quarter with a recovery into the second half of 2023 “may be difficult.”
Of the 38 analysts who cover Micron, 29 have buy-grade ratings, seven have hold ratings, and two have sell ratings. Of those, 20 lowered their price targets after the earnings report, resulting in an average target of $67, down from a previous $75.13, according to FactSet data.
For the year, Micron shares are down 46%, while the PHLX Semiconductor Index has fallen 42%, while the S&P 500 has dropped by a quarter, and the Nasdaq has shed nearly a third.