The Ratings Game: Micron’s stock has best month since 2013, even with drop from Morgan Stanley downgrade

Micron Technology Inc. shares fell Thursday following a downgrade from Morgan Stanley, which undercut what had been shaping up to be the stock’s strongest month in nearly a decade, but even with the sharp decline, shares still had their best month in nearly five years.

Micron MU, -7.96%  shares tumbled 8% to close at $57.59 Thursday and hit an intraday low of $57.17, after Morgan Stanley analyst Joseph Moore downgraded the stock to equal-weight from overweight. The stock had been approaching his price target of $65, he said in his note, and he sees “storm clouds on the horizon” for the memory-chip market.

The chipmaker’s stock was the worst performer on the PHLX Semiconductor Index SOX, -0.79% which finished down 0.8%, and the third-worst-performing stock on the S&P 500 SPX, -0.69%  on Thursday.

Prior to the downgrade, Micron shares had been on track for their strongest month since 2009 and were trading at levels not seen since 2000. With Thursday’s drop, Micron shares finished May up 25%, their strongest month since September 2013, driven by a raised outlook and an announced $10 billion share buyback earlier in the month. Shares are up 40% for the year and up 87% over the past 12 months.

The “storm clouds” Moore is concerned about refer to the pricing of DRAM and NAND memory chips. DRAM (dynamic random access memory) chips are the type of memory commonly used in PCs and servers, and NAND chips are the flash memory chips that are used in USB drives and smaller devices such as digital cameras. While pricing of chips has traditionally been cyclical, the explosion of internet-connected devices outside of phones and the rise of big data centers from companies like Amazon.com Inc. AMZN, +0.29% Microsoft Corp. MSFT, -0.11%  and Alphabet Inc.’s GOOG, +1.61% GOOGL, +2.09%  Google has upset that cycle considerably.

That unprecedented demand pushed the price of memory higher over the past few years. The huge investment required to create more manufacturing capacity, coupled with the risk that demand may drop or cycle down by the time that new capacity comes online, has made chip makers cautious about building new manufacturing facilities.

Given this, Moore said he believes there are some misconceptions fueling the memory-chip rally, particularly that data-center growth is a significant driver and hedge against oversupply. He notes:

It is true that our channel checks with cloud customers for DRAM, as recently as this week, show a complete insensitivity to price; in this period of extended shortage, the only concern in evidence was that they cannot get the memory that they need. But cloud vendors have built sophisticated procurement teams, in many cases with backgrounds in procurement from markets such as PCs or phones. If we should move into an oversupplied environment, prices will likely come down.

There also is concern that China, which accounts for nearly a quarter of world memory-chip demand and is still reliant on Micron, Samsung 005930, +2.42%  and SK Hynix 000660, -1.68%  for supply, may be trying to curb higher prices.

Given Micron’s surge to dotcom-era prices in such a short time, Moore said “any erosion in fundamentals will be punished.” The analyst also felt that optimism over NAND demand in the first half of the year is showing signs of fading. He noted:

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.

Taking Morgan Stanley’s downgrade into account, of the 30 analysts who cover Micron, 23 have buy or overweight ratings, six have hold ratings, and one has a sell rating, according to FactSet data. The average target price is $77.47.

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