Micron’s Results May Reveal an AI Winner Trading at a Discount

(Bloomberg) -- Micron Technology Inc. will probably become the latest chipmaker to assure investors that demand for AI-related gear is still strong. Like many peers, it may also admit that other staple areas of demand such as PCs and smartphones remain in the doldrums.

The company is due to report after market close, and analysts expect strong growth related to its high-bandwidth memory chips, used in artificial intelligence data processing. Positive commentary on AI demand could reinvigorate the AI chip trade, which stalled after mixed reports from Broadcom Inc. and Nvidia Corp.

Their forecasts disappointed demanding investors, similar to the reaction to Micron’s last update three months ago. Revenue growth exceeded 80%, but the outlook underwhelmed a market looking for a bigger boost from AI. After dropping nearly 40% from a June peak and underperforming other chipmakers this year, Micron’s shares now scan as potentially among the biggest bargains in the sector.

“Micron was a victim of high expectations last quarter, but the stock has come down quite a bit since then, which means it could be a beneficiary of low expectations by now,” said Christian Fromhertz, chief executive officer of Tribeca Trade Group. “It will have to say something positive to break above its overhead resistance, but it seems like people think it’s worth a shot at these levels.”

Fromhertz said a positive report could take the stock, which last closed at $94, past $100 again, possibly toward its 200-day moving average above $105. However, falling below recent support near $86 would be a bearish signal, he said.

Shares rose 1% on Wednesday.

There are signs of growing 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. Near-term bullish positions, especially, dwarf bearish ones, with large holdings in $100 calls expiring two days after earnings, and even larger positions in $95 and $155 calls.

October-expiry options are the most bullish since late July, before volatility shocks early the following month hastened a rotation away from tech stocks.

Citigroup Inc. predicts Micron shares will remain weak until pricing trends for DRAM memory chips reverse, something it expects will 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 many conversations with investors this week, it appeared roughly 80% were bearish on Micron with every hedge fund we spoke with being bearish but a few mutual funds being bullish.”

The longer-term picture suggests room for optimism. Based on the average analyst price target, Micron is seen rising more than 50% over the coming 12 months, by far the highest projected return among chipmakers, according to data compiled by Bloomberg.

Furthermore, Micron trades around 10 times forward earnings, making it the cheapest component of the Philadelphia Stock Exchange Semiconductor Index by this metric. Nvidia, in contrast, trades at above 34. ARM Holdings Plc tops the scale at 81.

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 is a supplier to Apple Inc. — continue to recover from a slump last year. Broadcom’s results also showcased weakness in non-AI businesses. In addition, Micron has faced challenges in increasing production of its new memory chips.

BNP Paribas Exane recently downgraded the stock by two notches, to underperform from outperform, becoming the only firm tracked by Bloomberg to recommend selling the shares.

“While some investors correctly anticipate downside risk to near-term results, we think Micron will underperform AI peers through ’25,” wrote analyst Karl Ackerman, whose $67 price target is the lowest on Wall Street.

The key question is to what degree any headwinds confronting the company are already reflected in the valuation. Daniel Morgan, senior portfolio manager at Synovus Trust, is optimistic on this front, suggesting Micron’s results could be a sector-wide catalyst.

“The worst is behind it, and the AI theme creates the potential for outperformance over the next several quarters,” Morgan said. “If Micron can confirm there’s something tangible behind the excitement, that will lift the whole AI space. It’s something the market is thirsting for.”

Tech Chart of the Day

The CBOE Apple VIX, which tracks a market estimate of future volatility for shares of Apple Inc., has been trending lower of late, recently closing at its lowest since June. The index is down more than 45% off a recent peak. Shares of Apple have risen 17% this year.