(Bloomberg) — Micron Technology Inc. is likely to become the latest chipmaker to assure investors that demand for AI-related gear remains strong. Like many rivals, it may also admit that other key demand areas such as PCs and smartphones are in the doldrums.
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The company is scheduled to report after the market closes, and analysts are expecting strong growth in its high-bandwidth memory chips, which are used in processing artificial intelligence data. Positive commentary on AI demand could revive trading in AI chips, which stalled after mixed reports from Broadcom Inc. and Nvidia Corp.
Their forecasts disappointed discerning investors, much as the reaction to Micron’s last update three months ago. Revenue growth topped 80%, but the outlook was disappointing for a market looking for a bigger boost from AI. After a nearly 40% drop from a June peak and underperforming other chipmakers this year, Micron’s stock is now being scanned as potentially one of the sector’s biggest buys.
“Micron was a victim of high expectations last quarter, but the stock has fallen significantly since then, meaning it can now benefit from low expectations,” said Christian Fromhertz, CEO of Tribeca Trade Group. “It will have to say something positive to move above overhead resistance, but it seems like 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 signal, he said.
Shares were little changed on Wednesday.
There are signs of increasing bullishness around Micron in the options market. The ratio of Micron put to call open interest is half of what it was a year ago. Short-term bullish positions, in particular, are eclipsing bearish positions, with large holdings in $100 calls expiring two days after earnings, and even larger positions in $95 and $155 calls.
Options expiring in October are the most bullish since late July, before volatility shocks early the following month prompted a shift away from technology stocks.
Citigroup Inc. predicts that Micron shares will remain weak until price trends for DRAM memory chips reverse, which is expected 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 the weakness in near-term sentiment.
“Based on the many conversations with investors this week, it looked like about 80% were pessimistic about Micron. All the hedge funds we spoke to were pessimistic, but a few mutual funds were bullish.”
The long-term picture suggests room for optimism. Based on the average analyst price target, Micron is expected to rise more than 50% over the next 12 months, by far the highest expected return among chipmakers, according to data compiled by Bloomberg.
Additionally, Micron trades for about 10 times forward earnings, making it the cheapest component of the Philadelphia Stock Exchange Semiconductor Index by this metric. Nvidia, on the other hand, trades for more than 32. ARM Holdings Plc tops the scale at nearly 80.
Sector catalyst
Still, many investors remain skeptical. While AI is seen as a tailwind for growth, Micron’s other markets — including personal computers and smartphones, where it supplies Apple Inc. — continue to recover from a slump last year. Broadcom’s results also showed weakness in non-AI businesses. And Micron has faced challenges in ramping up production of its new memory chips.
BNP Paribas Exane recently downgraded the stock two notches from outperform to underperform, making it the only firm tracked by Bloomberg to recommend selling the shares.
“While some investors are right to see downside risk to near-term results, we believe Micron will underperform AI peers through 2025,” wrote analyst Karl Ackerman, whose $67 price target is the lowest on Wall Street.
The big question is to what extent any headwinds the company is facing have been reflected in the valuation. Daniel Morgan, senior portfolio manager at Synovus Trust, is bullish on this front, suggesting that Micron’s results could be a catalyst for the sector.
“The worst is behind us 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 excitement, that will lift the entire AI space. It’s something the market is hungry for.”
Tech Chart of the Day
The CBOE Apple VIX, which tracks a market estimate of future volatility for Apple Inc. shares, has been falling lately, recently closing at its lowest point since June. The index is down more than 45% from a recent peak. Apple shares are up 17% this year.
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–With assistance from David Marino and Subrat Patnaik.
(Open market updates.)
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