Most Wall Street analysts believe semiconductor companies Micron Technology (MU +8.50%) and Intel (INTC 1.49%) are undervalued, but some think the stocks could drop sharply in the next year.
- Joseph Moore at Morgan Stanley has set Micron with a bear-case target price of $240 per share. That implies 43% downside from its current share price of $423.
- Kevin Cassidy at Rosenblatt Securities has set Intel with a target price of $30 per share. That implies 32% downside from its current share price of $44.
The forecasts quoted above suggest Micron and Intel are worth selling at their current prices. Here's why I agree.
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Micron Technology: 43% downside implied by Morgan Stanley's bear-case target price
Micron is a semiconductor company that develops memory and storage solutions for personal computers, mobile devices, data center servers, and automotive systems. The company manufactures DRAM memory products, including high-bandwidth memory (HBM), and NAND flash memory products.
Micron reported financial results that crushed estimates in the second quarter of fiscal 2026 (ended Feb. 26). Revenue increased 196% to $23.8 billion, driven by record sales in DRAM, HBM, and NAND memory products. Non-GAAP net income increased 682% to $12.20 per diluted share.
"Micron set new records across revenue, gross margin, earnings per share (EPS), and free cash flow in fiscal Q2, driven by a strong demand environment, tight industry supply, and our strong execution. And we expect significant records again in fiscal Q3," said CEO Sanjay Mehrotra.
However, investors have reason to be nervous. Memory chips are commodities, which means suppliers like Micron compete primarily on price, which itself is controlled by supply and demand. Demand for artificial intelligence (AI) infrastructure has led to a critical memory chip supply shortage, causing prices to triple or even quadruple in recent months.
Yet, history says the supply shortage will eventually become a supply glut as companies race to increase manufacturing capacity. That will cause prices to decrease. "There is very positive sentiment on near-term results, and very low conviction about the durability of that strength," according to Joseph Moore at Morgan Stanley.
Wall Street expects Micron's earnings to peak in fiscal 2027, then fall sharply through fiscal 2029. Admittedly, the current valuation of 19 times adjusted earnings is cheap for a company whose adjusted earnings increased 682% in the most recent quarter. However, the market may afford Micron a much lower multiple once the memory chip cycle has clearly peaked.
Consider the supply shortage that occurred during the COVID-19 pandemic: Supply was on the upswing by late 2022, and Micron shares traded at 6 times adjusted earnings after the company reported financial results for fiscal 2022. If Micron drops to the same valuation as the current supply shortage is resolved, the stock could lose more than half of its value.
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Intel: 32% downside implied by Rosenblatt Securities' target price
Intel is the market leader in central processing units (CPUs) for personal computers and data center servers, but it has lost substantial market share over the last decade due to execution missteps. The company delayed several process nodes (i.e., generations of chip manufacturing technology) during that period, allowing Taiwan Semiconductor (TSMC) to become the market leader.
Meanwhile, Advanced Micro Devices (AMD) has gained market share because it outsources manufacturing to TSMC. That means its chips have been made on more advanced nodes, which itself means greater performance and power efficiency. Similarly, Arm Holdings has also gained share because its licensing model allows clients to customize chip design based on their specific needs.
Intel bulls have been forecasting a turnaround for years, but the company's dismal financial results speak for themselves. Since the artificial intelligence boom started in early 2023 -- creating a golden opportunity for semiconductor companies -- Intel's sales have declined 16%, its gross margin has contracted 7 percentage points, and its net income has dropped 99%.
Intel's turnaround strategy centers on gaining share in chip manufacturing (foundry) services. Theoretically, making chips for companies like Nvidia could be a lucrative venture due to the demand for AI infrastructure. Furthermore, the U.S. government may offer incentives to companies that use American foundries because it would align with President Donald Trump's goal of revitalizing domestic manufacturing.
However, I doubt Intel will succeed. More than 90% of the world's most advanced chips are made in Taiwan because TSMC has a reputation for operational excellence. Meanwhile, Intel has a track record that does not inspire confidence. Why should customers switch from the top foundry to a fledgling foundry owned by a company that made countless technical missteps in the last decade?
Wall Street estimates Intel's earnings will grow 20% in 2026. But even if the consensus forecast is accurate, the current valuation of 110 times earnings is still absurdly expensive. Investors have already priced in a turnaround that seems more fiction than fact. I don't know whether Intel shares will decline 32%, but the stock is certainly vulnerable to a steep drawdown.
