Micron Technology (MU 2.92%) has been a surprise package on the stock market this year, as shares of the memory specialist are up 27% so far even while its top and bottom lines got decimated on account of weak memory demand. What's even more surprising is that Wall Street analysts are recommending buying the stock.
Citi analysts recently issued a buy rating on Micron stock with a $75 price target, which points toward a 19% upside from current levels. What's more, Citigroup isn't the only one that's optimistic about Micron. JPMorgan also has a buy rating on the stock despite citing near-term headwinds along with a $65 price target.
So, does this mean investors who have been staying away from Micron Technology because of the turmoil in the memory market should start buying this semiconductor stock? Let's find out.
Micron Technology isn't out of the woods yet
Both Citi and JPMorgan forecast the memory market will hit the bottom of the current cycle in the next six months. Citi says that reduced spending by memory market participants, including Micron, could help reduce oversupply in the market. Meanwhile, JPMorgan sees memory prices stabilizing in the second half of the year as customers start restocking inventory.
What's more, JPMorgan projects that memory demand will start rebounding in 2024 thanks to catalysts such as cloud computing. Again, emerging tech trends such as generative AI could also be tailwinds for Micron, as they need faster memory chips. The good part is that Micron's fiscal 2023 second-quarter results (for the three months ended March 2, 2023) indicate that the memory market could turn around over the next few months. CEO Sanjay Mehrotra remarked on the company's latest earnings conference call:
We now believe that customer inventories have reduced in several end markets, and we see gradually improving supply demand balance in the months ahead.
This led to a sharp spike in Micron's stock price as management's positive commentary was enough to make investors forget about the steep decline in the company's earnings and revenue in Q2. Micron's revenue was down a whopping 52% year over year to $3.7 billion. The chipmaker swung to a loss of $1.91 per share from a profit of $2.14 per share in the year-ago period. The outlook wasn't bright either. Micron expects $3.7 billion in revenue in the current quarter, which would translate into a 57% decline over the prior year. The company has also guided for an adjusted loss of $1.58 per share, which compares poorly to a profit of $2.59 per share in the year-ago quarter.
A closer look at the situation on the ground will tell us why Micron is going to suffer, at least in the near term.
Market research firm IDC reduced its personal computer (PC) shipment forecast for 2023 to 260.8 million units, a drop of 10.7% over last year. It earlier forecasted 281 million in PC shipments this year. The downgraded outlook reflects the potential impact of inflation, excess inventory, and macroeconomic headwinds. IDC expects PC demand to start growing once again from 2024 as Windows 10 starts getting phased out.
Meanwhile, global smartphone shipments are now expected to decline 1.1% in 2023 as compared to IDC's prior forecast of 2.8% growth. The weakness in these markets will weigh heavily on DRAM (dynamic random access memory) demand, the segment that produced 69% of Micron's revenue in the first quarter of fiscal 2023. Smartphones, for example, accounted for 38.5% of the DRAM market in 2022, so a decline in shipments will make it difficult for the memory market to turn around.
The gloomy smartphone and PC forecasts are reflected in Micron's top- and bottom-line forecasts for the fiscal year. Its revenue is expected to drop by nearly half to $15.6 billion in fiscal 2023. The company's earnings of $8.35 per share last fiscal year are forecasted to be wiped out, and it is expected to swing to a loss of $4.09 per share.
What should investors do?
Wall Street's price targets indicate Micron could deliver upside and the company's latest results have also added to the positive hype, but investors would do well to wait on the sidelines and look for signs of a turnaround. The company's results were weak and a turnaround in the PC and smartphone markets is still some time away.
However, there is one bright spot for the company that management referred to on the earnings call: artificial intelligence (AI). With tech giants in a race to develop generative AI applications such as chatbots and spending billions of dollars to get ahead of each other, the demand for server DRAM is expected to boom.
TrendForce estimates that server DRAM could account for 40% of the overall DRAM market next year as compared to 34.9% at the end of 2022, spurred by the need for AI applications and high-performance computing (HPC). Positive commentary with respect to the gains that AI could deliver for Micron seems to have given the stock a shot in the arm. But even then, investors shouldn't be in a hurry to buy this semiconductor stock, given the massive headwinds it faces, especially considering that it is trading at just 11 times trailing earnings.
Instead, a turnaround in the PC and the smartphone markets, along with a surge in server DRAM demand on account of AI, would be the ideal catalysts to watch out for. That's why investors may consider adding Micron Technology stock to their watch lists and buy it when there is evidence that its end markets are improving.
