Micron Stock Is Slipping. Morgan Stanley Turned Bearish.

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Micron

Technology stock is lower Friday after Morgan Stanley analyst Joseph Moore issued a starkly negative new report on the memory-chip company, cutting his rating on the stock to Underweight from Equal Weight.

Moore maintains his $56 target on Micron (ticker: MU), which closed Thursday at $63.64.

On June 30, Micron posted financial results for its fiscal third quarter ended June 2 that were about in line with Street estimates. But the news that day was the outlook: Micron issued August-quarter guidance that was dramatically shy of Street estimates. Micron sees revenue for the quarter of $7.2 billion and non-GAAP profits of $1.63 a share; the Street had been looking for revenue of $9.1 billion and non-GAAP profits of $2.62 a share. 

“Near the end of fiscal Q3, we saw a significant reduction in near-term industry bit demand, primarily attributable to end-demand weakness in consumer markets, including PC and smartphone,” Micron CEO Sanjay Mehrotra said at the time. “These consumer markets have been impacted by the weakness in consumer spending in China, the Russia-Ukraine war, and rising inflation around the world.”

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What’s surprising is that despite the grim forecast Micron stock has rallied 19% since the June 1 close at $53.55. The Street seemed to view the soft outlook as a bottom for the company’s fundamentals. Moore disagrees.

“We take issue with the recent sentiment that Micron’s weaker guidance ‘clears the decks’ and makes the stock—and to some degree the group—set up for better outcomes,” Moore writes in a research note. “While Micron likely guided conservatively relative to their outlook at the time, the market continues to deteriorate, both volume (the primary reason for the weaker guidance) and pricing.”

Moore writes that he’s heard from multiple Micron customers that they are taking a more-aggressive approach to inventory management now, with some PC and server manufacturer DRAM purchases down 30% in the current quarter from the June quarter. And he notes that pricing for DRAM targeting cloud applications this week was being quoted by Micron competitors down 20% or more.

Moore adds that while customers are working down what had been elevated inventory, producer inventory levels are rising. “The result of this dynamic is an uncertain setup into 2023,” Moore writes.

Moore concedes that Micron stock seems “very inexpensive” based on a trailing price/earnings multiple, with book value at $42.50 a share providing downside protection. But he thinks the stock actually looks pricey based on current or trough cash-flow multiples. And he advises investors to focus more on cash flow as a key metric—and notes that the stock has in the past fallen below book value. “On cash flow, the company is materially more expensive than memory peers,” he writes.

Micron stock is down 3.3% to $61.54.

Write to Eric J. Savitz at [email protected]