Micron is ‘at the bottom of this deep downturn,’ but ‘China complicates the recovery plan’

BMO Capital Markets analyst Ambrish Srivastava expects gross margins to “trough” in the second half of the year, writing, “We believe we are at the bottom of this deep downturn.”

But there could be a hitch in that recovery: China weighs on the memory-chip specialist’s outlook, said Stifel analyst Brian Chin, who has a hold rating and a $65 target price on the stock. Back in May, China’s National Security Review Office ruled Micron did not pass its security review, recommending that “operators of critical information infrastructure in China should stop purchasing Micron products.”

Chin expects the “brunt” of “incremental impact” from the China restrictions to hit in the August-ending, and fiscal-year-ending, quarter. “Based on management’s most recent best estimate, roughly half of its sales exposure into China could be at risk, equating to about 12-13% of total sales.” The analyst revised his fourth-quarter forecast to a loss of $1.22 a share on revenue of $3.2 billion, from a previous estimate of a loss of $1.40 a share on revenue of $3.82 billion.

Micron makes two types of memory chips: DRAM, or dynamic random access memory, the type of memory commonly used in PCs and servers, and NAND, the flash memory chips used in smaller devices like smartphones and USB drives. After prices for memory soared early in the COVID-19 pandemic, companies built up large stores of the chips to avoid shortages, and now are not buying as many chips,

“The situation in China complicates the recovery path for Micron,” Chin said. “In the short-run (in an oversupplied memory market), Micron may find it more challenging to maintain bit share, though in the mid-longer run this could be improved once the situation in China is clearer and the industry is in better health. Initially, we expect Micron could be forced to carry higher inventory for longer.” Chin estimated inventories of five to six months or more.

Srivastava, who had an outperform rating and an $80 price target on the stock, said he’s interested in how the company has made “progress on the big blob of excess inventory in the channel, where we expect the PC and handset related inventory to be wrung out by the middle of the year, followed by data center (until the end of the year).”

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Morgan Stanley analyst Joseph Moore said he was remaining underweight on the stock because the memory market was “mixed at the moment.”

“Conditions have likely stopped getting worse, and the AI boom leaves room for optimism,” Moore said. “But we remain convinced that the market is meaningfully oversupplied longer term, with any strength bringing back latent supply.”

Evercore ISI analyst C.J Muse said he’s balancing the pro-cyclical outlook on the memory market with “one more, China-led cut to numbers.”

Muse, who had an outperform rating on the stock, raised his price target to $80 from $75.

“We see potential for Micron to regain lost share globally in the medium/longer-term given the fungible nature of the market, but clearly something to monitor with about one-quarter of Micron’s revenues coming either directly or indirectly from companies headquartered in mainland China and Hong Kong,” Muse said.

Analysts surveyed by FactSet expect a fourth-quarter loss of $1.09 a share on revenue of $3.9 billion. For the quarter Micron will be reporting on after the bell Wednesday, analysts forecast a loss of $1.60 a share on revenue of $3.66 billion.

Of the 38 analysts who cover Micron, 26 had buy grade ratings, nine had holds, and three had sell ratings, along with an average price target of $73.35, according to FactSet data.

Year to date, Micron shares are up 32%, while the PHLX Semiconductor Index 
SOX,
+0.26%
has gained 39%, the S&P 500 index 
SPX,
-0.45%
has risen 13%, and the tech-heavy Nasdaq Composite Index 
COMP,
-1.16%
 has gained 28%.