'Memory - Winter is Coming': Morgan Stanley Downgrades Micron (MU) to EW as Supply is Catching Up To Demand, Prefers Samsung (SSNLF)

August 12, 2021 7:18 AM EDT
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Morgan Stanley analyst Joseph Moore downgraded shares of Micron (NASDAQ: MU) to “Equal-weight” from “Overweight” as the entire memory sector is entering a phase that brings more risk to the table.

The team of analysts at MS argues that the supply is catching up to demand while the pricing remains high.

“Our cycle indicator has shifted out of 'mid-cycle' to 'late-cycle' for the first time since 2019 and this phase-change has historically meant a challenging backdrop for forward returns. We expect earnings growth expectations to reverse, near 30% PB valuation contraction and higher chances of positioning reset,” analysts wrote in a note sent to clients.

“We were prepared to become more constructive under the right conditions, but ultimately it is about inflections in the cycle and trajectory of earnings estimate revision breadth – the former approaching an earlier peak YoY pricing and latter approaching negative earnings risk that follows.”

MS expects better entry points available in the future as right now:

1) the next cyclical downturn begins from 1Q22 and DRAM will stay fundamentally oversupplied in 2022, exacerbated by inventory builds;

2) recent growth indicators have downticked, while demand held back by component supply;

3) valuation is no longer compelling on the way down; and tactically buying on the dip no longer makes sense from a quant perspective.

A new price target on MU is $75.00 per share, down from $105.00 per share.

“While we have been impressed by the structural improvements at the company, and we see limited downside, we see the stock as effectively range bound in an environment where DRAM prices start to decline. August quarter results should still have upside, and that could persist into November. But the 35% increase in DRAM prices in the last two quarters, with further modest increase expected through year end, creates risks of a steeper decline next year, given the elevated state of customer inventories in some markets,” Moore said.

“The problem we see for DRAM is that modest price declines could snowball quickly, as customers are likely to react to such shifts by slowing purchasing to draw down inventory. We see that as an issue in PCs and in servers, and while we didn't see that as likely in mobile, the company's recent commentary that mobile DRAM is somewhat elevated as well creates some concerns there.”

Morgan Stanley prefers NAND/NOR over DRAM, with Samsung, WDC, and GigaDevice outlined as favorite players.

“Quality can mean a lot of things and for many investors it simply means large cap growth wins in a decelerating environment. While Samsung fits the high-quality bill, we think the quality rotation will now begin to favor Samsung's more defensive properties like earnings stability rather than growth. In previous corrections, Samsung has consistently outperformed the memory sector and often the MSCI Asia benchmark, and we believe the business attributes are fundamentally more appealing in the current environment given cost/product leadership as well as optionality on seizing new addressable markets,” Kim concludes

Shares of Micron are down 3% in pre-open Thursday.

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