Micron Set to Test Resolve of Fed-Rattled Traders

2023-09-27 18:50

Micron Technology Inc. is set to provide one of the first tests for investors hoping that tech earnings

Micron Technology Inc. is set to provide one of the first tests for investors hoping that tech earnings will rescue a stock market in freefall.

The memory chip-maker is slated to report results after the close Wednesday, and investors will be looking for evidence that the brutal slump in its main market is finally ending. The report comes a day after the S&P 500’s tech index entered a correction, falling 10% from its July peak — with stocks rattled by a Federal Reserve that’s determined to keep interest rates at levels not seen in a decade.

“Higher rates have weighed on and reversed the massive AI rally we saw pre-August, but all of that can potentially come back into play if we see positive earnings,” said Sylvia Jablonski, co-founder and chief investment officer at Defiance ETFs. Earnings beats on the top and bottom line for Micron “may help to seal positive momentum around the idea that AI is becoming monetizable,” she added.

Micron and peers including Samsung Electronics Co. and SK Hynix Inc. have suffered from a collapse in orders for memory chips this year, amid weak demand for smartphones and personal computers. While neither of those markets are rebounding strongly, excess inventory is falling. This may help balance supply and demand and allow companies to take advantage of an increase in orders for their highest-performing products, which are needed for AI-related computer systems.

Wall Street has already decided that Micron is on the cusp of a change in fortunes. Only two of the 38 analysts who cover the company have a sell recommendation, with the vast majority recommending buying its stock, according to data compiled by Bloomberg. Micron shares are priced at 3.5 times sales projected over the next 12 months, compared with an average of 2 times over the past decade.

The Nasdaq 100 has plunged more than 6% in September and is now at the lowest since early June. Micron has fared better, losing just 2.9%. Analysts are expecting the company’s revenue to begin expanding again in the first quarter after the massive drop in sales in the fiscal year. If Micron’s forecast meets or exceeds that, it’ll add to optimism that’s fueled a 36% advance in the stock this year.

One key area for analysts is so-called high-bandwidth memory, or HBM, a type of chip that’s needed for AI software training. That work, conducted in large data centers using Nvidia Corp.’s accelerator chips, needs rapid access to huge amounts of information. Memory chips which support processors by acting as short-term storage need to be able to offer up that data as fast as possible in order to eliminate a possible bottleneck.

For Mizuho analyst Vijay Rakesh, there is currently not enough HBM supply to meet demand in 2024. Those higher-performing chips will bring better pricing and margins, according to Rakesh. And that’ll be a welcome relief following one of the worst downturns the volatile memory chip industry has suffered.

Of course, not everyone is buying into the idea that Micron’s troubles are over. The improvements in memory pricing have come because Micron and its peers have slowed production, according to Morgan Stanley analyst Joseph Moore. That’s not the same as demand rebounding, and the company’s losses are poised to continue into 2024, he predicts.

“We see the stock already discounting strong conditions not yet in evidence,” said Moore.

Tech Chart of the Day

The S&P 500 tech index sank 1.8% on Tuesday, officially entering into correction territory, defined as a drop of 10% from a peak. The day’s losses were widespread, with Apple Inc. dropping 2.3% and Microsoft Corp down 1.7%. The tech index closed at its lowest since May.