(Bloomberg) — Micron Technology Inc. will likely become the latest chipmaker to assure investors that demand for AI-related equipment is still strong. Like many of its peers, it can also admit that other core demand areas, such as PCs and smartphones, remain in the doldrums.
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The company is expected to report after the market close, and analysts expect strong growth from its high-bandwidth memory chips, used in processing artificial intelligence data. Positive comments on AI demand could revive AI chip trading, which has stagnated after mixed reports from Broadcom Inc. and Nvidia Corp.
Their forecasts disappointed discerning investors, much like the reaction to Micron’s latest update three months ago. Revenue growth topped 80%, but the outlook disappointed a market that expected a bigger boost from AI. After falling nearly 40% from its June peak and underperforming other chipmakers this year, Micron shares are now among the industry’s biggest bargains.
“Micron was a victim of high expectations last quarter, but the stock has declined significantly since then, meaning it could now benefit from low expectations,” said Christian Fromhertz, CEO of Tribeca Trade Group. “He’ll have to say something positive to get past his aerial resistance, but it seems people think it’s worth a try at these levels.”
Fromhertz said a positive report could take the stock, which last closed at $94, above $100, perhaps toward its 200-day moving average above $105. However, falling below the recent support near $86 would be a bearish signal, he said.
Shares rose 1% on Wednesday.
There are signs of growing optimism around Micron in the options market. The open interest ratio listed by Micron is half of what it was a year ago. Short-term bullish positions, in particular, dwarf bearish positions, with large holdings in the $100 calls expiring two days after earnings, and even larger positions in the $95 and $155 calls.
Options expiring in October are the most bullish since late July, before volatility shocks at the start of the following month accelerated the rotation in technology stocks.
Citigroup Inc. predicts that Micron shares will remain weak until the price trend for DRAM memory chips reverses, which is expected to happen within three to six months. While it enjoys a Buy rating – as do over 90% of analysts overall – analyst Christopher Danely noted weak near-term sentiment.
“Based on numerous conversations with investors this week, it appeared that about 80% were bearish on Micron, with all of the hedge funds we spoke with being bearish, but a few mutual funds being bullish.”
The longer-term picture suggests optimism. Based on analysts’ average 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 that measure. Nvidia, on the other hand, is trading above 34. ARM Holdings Plc tops the scale at 81.
Industry catalyst
Yet many investors remain skeptical. While AI is seen as a growth engine, Micron’s other markets, including personal computers and smartphones, where the company is a supplier to Apple Inc., continue to recover from the year’s downturn last. Broadcom’s results also highlighted weakness in non-AI businesses. Additionally, Micron has faced challenges in scaling up production of its new memory chips.
BNP Paribas Exane recently lowered its rating by two notches from outperform to underperform, becoming the only company tracked by Bloomberg to recommend the shares sell.
“While some investors rightly anticipate downside risk to near-term earnings, we believe Micron will underperform its AI peers through 2025,” wrote analyst Karl Ackerman, whose target price of $67 is the lowest on Wall Street.
The key question is to what extent any possible headwinds the company faces are already reflected in the valuation. Daniel Morgan, senior portfolio manager at Synovus Trust, is bullish on this front, suggesting that Micron’s results could be an industry-wide catalyst.
“The worst is behind all of this, and the AI theme creates potential for outperformance in the coming quarters,” Morgan said. “If Micron can confirm that there is something tangible behind this enthusiasm, it will lift the entire AI space. This is something the market is hungry for.
Technical table of the day
The CBOE Apple VIX Index, which tracks a market estimate of future volatility in Apple Inc. shares, has been trending downward lately, recently closing at its lowest level since June. The index is down more than 45% from its recent peak. Apple shares are up 17% this year.
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Earnings expected Wednesday
–With help from David Marino and Subrat Patnaik.
(Updates from afternoon exchanges.)
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