Micron's results could reveal an AI winner trading at a discount

(Bloomberg) — Micron Technology Inc. is likely the latest chipmaker to reassure investors that demand for AI devices remains strong. Like many of its rivals, the company may also acknowledge that demand remains weak in other core areas such as PCs and smartphones.

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The company will report earnings after the market close. Analysts expect strong growth related to its high-bandwidth memory chips used in artificial intelligence computing. Positive comments on AI demand could revive AI chip trading, which has stalled after mixed reports from Broadcom Inc. and Nvidia Corp.

Their forecasts disappointed sophisticated investors, much like the reaction to Micron's last update three months ago. Revenue growth was over 80 percent, but the outlook disappointed a market that had expected a bigger boost from AI. After falling nearly 40 percent since their June peak and underperforming other chipmakers this year, Micron's shares are now seen as potentially one of the biggest bargains in the industry.

“Micron was a victim of high expectations last quarter, but the stock has fallen quite a bit since then, meaning it could benefit from low expectations by now,” said Christian Fromhertz, CEO of Tribeca Trade Group. “The stock will need to have something positive to say to overcome resistance, but it seems like people think it's worth a shot at this level.”

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 at $86 would be a bearish signal, he said.

Shares rose 1% on Wednesday.

There are signs of growing bullishness on Micron in the options market. The ratio of Micron put to call open interest is half what it was a year ago. In particular, short-term bullishness is outpacing bearish positions, with large holdings of $100 calls expiring two days after earnings and even larger positions in $95 and $155 calls.

Options expiring in October are at their most optimistic levels since late July, before volatility shocks at the beginning of the following month accelerated a move away from technology stocks.

Citigroup Inc. predicts that Micron stock will remain weak until the price trend for DRAM memory chips reverses, which is expected to happen within three to six months. Although the stock is rated “buy” – like more than 90% of analysts overall – analyst Christopher Danely notes the weakness in short-term sentiment.

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“From many conversations with investors this week, about 80% were bearish on Micron. Every hedge fund we spoke to was bearish, but some mutual funds were bullish.”

The longer-term picture gives cause for optimism. Based on the average price target of analysts, Micron is expected to rise by more than 50 percent in the next twelve months. This will give the stock by far the highest return among chip manufacturers, according to Bloomberg data.

In addition, Micron trades at 10 times forward earnings, making it the cheapest component of the Philadelphia Stock Exchange Semiconductor Index by that measure. Nvidia, on the other hand, trades at over 34. ARM Holdings Plc tops the scale at 81.

Sector catalyst

Still, many investors remain skeptical. While artificial intelligence is seen as a growth driver, Micron's other markets – including PCs and smartphones, where the company supplies Apple Inc. – continue to recover from a slump last year. Broadcom's results also showed weakness in non-AI businesses. In addition, Micron has struggled to increase production of new memory chips.

BNP Paribas Exane recently downgraded the stock's rating by two notches from “outperform” to “underperform,” making it the only company tracked by Bloomberg to recommend selling the shares.

“While some investors correctly assess the downside risk to near-term results, 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 any headwinds the company faces are already reflected in its valuation. Daniel Morgan, senior portfolio manager at Synovus Trust, is optimistic on this, saying Micron's results could be an industry-wide catalyst.

“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, it will give the entire AI space a boost. That's something the market is hungry for.”

Tech chart of the day

The CBOE Apple VIX, which tracks the market's assessment of future volatility in Apple shares, has been trending lower lately, recently closing at its lowest level since June. The index is more than 45 percent below its recent peak. Apple shares are up 17 percent this year.

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Results due on Wednesday

– With support from David Marino and Subrat Patnaik.

(Afternoon trading updates.)

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