Shares of Micron Technology (MU) are down $3.65, or 6%, at $58.92, after Joseph Moore with Morgan Stanley this morning cut his rating on the stock to Equal Weight from Overweight, while maintaining a $65 price target, arguing that things are “structurally” better for the whole memory-chip industry, but that Micron’s stock is already reflecting that improvement at the current price.
“We see memory markets as structurally improved vs. history, but still think that current valuations price that in, leaving little room for upside,” he writes. “We can see storm clouds on the horizon,”
At the current price, “the stock prices in a very upbeat long-term scenario, and any erosion in fundamentals will be punished.”
Moore thinks he could be “early” in his call, and there’s “no urgent need to sell stocks,” but he also notices the shares have zoomed by 40% in three weeks.
And a telling sign, he thinks, is how he himself is being portrayed: “We are more and more frequently being painted as the ‘bears’ in longer-term discussions,” he observes, “an indication that the pendulum may have swung from too negative six months ago (and a few weeks ago) to overly optimistic now.”
Micron makes two kinds of chips, DRAM and NAND flash. The DRAM portion is just fine, according to Moore; NAND is the problem.
NAND prices have been declining but not as badly as he thought. But with new supply coming on, he expects a big drop in prices in Q4 of this year:
YTD pricing has been above our expectations around a sense of optimism around the second half, which we think led to a mild inventory build at producers. Our checks in the last 2-3 weeks show that optimism starting to fade, and we continue to budget for high single-digit price declines in 3q and 4q, which should bring 4q prices down 30% y/y. Samsung has now called for prices down high single digits in both 3q and 4q.
As for DRAM, prices have held up and may still go higher through Q3, but one of the factors that has been driving the chips’ sales, cloud computing operators buying for their data center, appears to be cooling, writes Moore.
“Our conversations with cloud buyers indicate more of a mixed picture than we have heard in recent quarters,” writes Moore, “with everyone getting what they need and some mild pushouts in timing.”
He sees supply of DRAM “accelerating” next year, and even though he thinks price declines as a result may be “mild,” nevertheless, “we would note that the inelasticity of the DRAM market makes pricing unpredictable, as small supply/demand imbalances are amplified.”
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