(Bloomberg) — Micron Technology Inc. is likely to become the latest chipmaker to reassure investors that demand for artificial intelligence-related equipment remains strong. Like many other competitors, it may also admit that other core demand areas, such as personal computers and smartphones, remain stagnant.
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The company is scheduled to report earnings after the market closes, and analysts expect strong growth related to its high-bandwidth memory chips, used in artificial intelligence data processing. Positive comments on AI demand could revive AI chip trading, which has stagnated following mixed reports from Broadcom Inc. and Nvidia Corp.
Its guidance disappointed discerning investors, similar to the reaction Micron had to its last update three months ago. Revenue growth topped 80%, but the outlook disappointed a market that had hoped for a bigger boost from artificial intelligence. After falling nearly 40% from a peak in June and underperforming other chipmakers this year, Micron shares now look to be among the biggest bargains in the sector.
“Micron fell victim to high expectations last quarter, but the stock has come down quite a bit since then, meaning it could benefit from low expectations at this point,” said Christian Fromhertz, chief executive of Tribeca Trade Group. “It will need to say something positive to break above its overhead resistance, but it seems people think it’s worth a shot at these levels.”
Fromhertz said a positive report could push the stock, which last closed at $94, back above $100, possibly toward its 200-day moving average above $105. However, a drop below recent support near $86 would be a bearish sign, he said.
Shares rose 1% on Wednesday.
There are signs of growing optimism around Micron in the options market. The ratio of open interest in Micron puts to calls is half what it was a year ago. Short-term bullish positions, in particular, dwarf bearish ones, with large holdings in $100 call options expiring two days after earnings, and even larger positions in $95 and $155 call options.
Options expiring in October are the most bullish since late July, before volatility shocks early next month accelerated a rotation away from technology stocks.
Citigroup Inc. predicts that Micron shares will remain weak until price trends in DRAM memory chips reverse, something it expects to happen within three to six months. While it has a buy rating (as do more than 90% of analysts overall), analyst Christopher Danely noted weakness in near-term sentiment.
“Based on many conversations with investors this week, it seemed like about 80% had a bearish view on Micron; all of the hedge funds we spoke to had a bearish view, but a few mutual funds had a bullish view.”
The long-term picture suggests there is room for optimism. Based on the average analyst price target, Micron is forecast to rise more than 50% over the next 12 months, by far the strongest expected return among chipmakers, according to data compiled by Bloomberg.
Micron also trades at about 10 times forward earnings, making it the cheapest component of the Philadelphia Stock Exchange semiconductor index by this metric. Nvidia, by contrast, trades at more than 34. ARM Holdings Plc tops the scale at 81.
Catalyst of the sector
But many investors remain skeptical. While AI is seen as a growth driver, Micron’s other markets — including personal computers and smartphones, where it is a supplier to Apple Inc. — are still recovering from last year’s slump. Broadcom’s results also showed weakness in non-AI businesses. In addition, Micron has faced challenges in ramping up production of its new memory chips.
BNP Paribas Exane recently downgraded its stock by two notches, from “outperform” to “underperform,” making it the only company tracked by Bloomberg that recommends selling the shares.
“While some investors correctly anticipate the risk of a near-term downturn in earnings, we believe Micron will underperform its AI peers through 2025,” wrote analyst Karl Ackerman, whose $67 price target is the lowest on Wall Street.
The key question is to what extent the company's headwinds are already reflected in the valuation. Daniel Morgan, senior portfolio manager at Synovus Trust, is optimistic on this front, suggesting that Micron's results could be a catalyst for the entire sector.
“The worst is over and the AI theme creates the potential for outperformance in the coming quarters,” Morgan said. “If Micron can confirm that there is something tangible behind the hype, that will boost the entire AI sector. That’s something the market is hungry for.”
Tech Chart of the Day
The CBOE Apple VIX index, which tracks the market’s estimate of future volatility in Apple Inc. stock, has been trending lower lately and recently closed at its lowest level since June. The index is down more than 45% from a recent peak. Apple shares are up 17% this year.
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Earnings to be released on Wednesday
–With assistance from David Marino and Subrat Patnaik.
(Afternoon operations update).
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