Morgan Stanley equity analysts trimmed their price target on Micron (NASDAQ:MU) shares while maintaining an Equal Weight rating on the memory chipmaker.
The move comes as the Wall Street firm stands 30% below consensus on earnings per share (EPS) estimates for the fiscal 2025. While its outlook on the High-Bandwith Memory (HBM) sector remains positive, Morgan Stanley’s team believes it does not address the fundamental issue of commodity oversupply in the market.
Micron shares fell more than 3% in premarket trading Monday.
Analysts have outlined five key points on the MU stock and the broader high bandwidth memory (HBM) market in their note.
1) HBM is expected to generate significant profits for Micron, aligning with market expectations. Micron’s HBM3e product has improved after initial issues, and although margins may decrease with more suppliers entering the market, strong demand from AI companies ensures solid profitability.
2) Meanwhile, the oversupply situation in HBM is complex. Although there is excess capacity, it's manageable by shifting production to DDR5 or adjusting equipment. While oversupply exists, it hasn't affected profitability much due to customer prepayments and transitioning to newer technologies like HBM3e.
“But our view that this is a solid profit pool is not that HBM is a commodity in short supply, it is that it is more of a design win business that will carry a meaningful premium to standard DRAM,” analysts added.
3) Analysts disagree with the consensus that HBM production will limit supply growth for other markets like PCs and smartphones. They argue that the shift to HBM will not solve oversupply issues in other DRAM markets, maintaining a cautious stance on the broader memory market.
4) For the second half of 2024, volume remains weak, but prices are holding up due to supply control measures. While price increases may slow in Q4, Micron’s pricing strategy remains resilient amid weak demand.
5) The Equal-weight rating for Micron stock stems from high valuation concerns, Morgan Stanley explains.
Despite improving fundamentals, analysts are skeptical about the high stock price. Although earnings could positively surprise, the stock’s valuation remains a key concern.