Micron Stock: The Sell-Off We’ve Been Waiting For – Upgrading To Strong Buy

Summary:

• Micron Technology just reported its 1QFY25 earnings results and outlook, causing the stock to slide 16% lower for the day; we’re upgrading the stock to a strong buy.
• We think the slower end demand rebound and industry oversupply are now priced into the stock and outlook, resetting expectations and making MU better positioned to outperform.
• We think MU will benefit from share gain in the HBM market as well as PC TAM expansion towards 2H25.
• We see attractive entry points in MU stock at current levels for the mid-to-long-term investor.

Micron Q1 earnings

We’re upgrading Micron Technology (NASDAQ:MU) to a strong buy after Wednesday’s 1QFY25 earnings results and outlook triggered the stock to trade 16% lower on Thursday so far. We’ve been long-time fans of MU and believe that at current levels, the stock has bottomed, providing the perfect entry point for gains in their 2HFY25.

For the quarter, MU beat on top and bottom lines, but the real catch was an outlook, which was extremely weak for the near-term. For Q2, MU is guiding for an adjusted $1.43 a share on sales of $7.9B at the mid-point; this is not only forecasting a sequential decline on top and bottom lines but also its trailing consensus for adjusted EPS of $1.91 on sales of $8.94B. Ouch.

The reason for this painful outlook is that the market is in oversupply, considering the lackluster rebound in end demand from both PC and smartphone. This isn’t entirely surprising, considering memory spot prices have been sliding; TrendForce reported around mid-September DRAM prices falling across the board, and then again in November with weaker memory spot prices, signaling the weak end market demand and falling DDR4 demand, leading to higher inventory levels. Management themselves noted on the call that they had previously expected customer inventory reductions in consumer-oriented business lines, i.e. PC and smartphone, to impact Q2, but the impact is more pronounced than they had imagined, leading to the weaker Q2 guide. This is to say there is a clear pain point causing MU’s weaker-than-expected demand, and we think investors should take advantage of it.

What happened on Wednesday?

For its November quarter, MU reported sales up 14% Q/Q and 84% Y/Y to $8.71B versus estimates for $8.71B driven by higher DRAM sales during the quarter, which grew 20% Q/Q to $6.4B or 73% of total sales.

For DRAM, bit shipments were up 12% Q/Q, and ASP (average selling price) was 8% higher sequentially. NAND sales, on the other hand, didn’t do too well, declining 5% Q/Q with a 3% drop in bit shipments and a 2% contraction in ASP. This, too, is not too surprising considering Western Digital Corp (WDC) comments on the recent Barclays Global Tech conference, stating the following: “…as we go through this quarter…there are more pricing headwinds than we expected when we entered the quarter.” So, as far as 1H25 visibility, it looks like we continue to have weak end demand from PCs and smartphones, and that is now getting priced into the stock price and resetting expectations, making MU, in our opinion, better positioned to outperform next year, and there are a couple of reasons why.

For starters, we expect PC demand to come back towards 2H25 with three things at play simultaneously: a better interest rate environment, enterprise refresh cycle with hiring, and Microsoft Windows 10 End of Life (EOL) set for October 2025. We think these factors combined will lead to a PC TAM (total addressable market) expansion next year, and this will benefit MU’s DRAM sales, substantially. Because AI PC will require a lot more DRAM demand than traditional PCs; management noted on the call that:

AI PCs will require additional DRAM content, with a minimum of 16GB of DRAM for entry-level PCs and 24GB and above for higher-end segments, versus 12GB average PC content last year.

The chart below shows the current DRAM market share as of 2QCY24, with MU third after Samsung and SK Hynix. We think this makes it well positioned to benefit from PC TAM expansion next year.

For PCs, management expects “PC units to grow in the mid-single-digit percentage range in CY2025, with growth weighted toward the second half.” We agree with this outlook but emphasize what looks alike the slow start of the CY2025 in terms of end demand rebound. Where smartphone are concerned, management expects low-single-digit percentage growth in CY2025, also weighed towards the second half.

Now, for the good part: HBM

HBM, or high-bandwidth memory, took center stage last quarter. It pushed the stock price higher, getting the market overly optimistic and turning attention away from the lack of PC and smartphone end demand. Our positive thesis on MU, however, continues to be centered around its position in HBM and, more specifically, its share gain there on design wins. HBM is predicted to make up around 30% of DRAM sales next year, and given MU’s status as the third-largest market share, we expect the company to build up a substantial share throughout the year. MU itself expects its HBM share to match its share of the DRAM market by 2H25, which would take its share from what, we assume, is a current low-to-mid single-digit percentage to around 20% before the end of FY25.

Here are a couple of HBM updates for this quarter:

• MU is ramping 1β (1-beta) technology node, which supports HBM3E” and “are preparing to ramp our 1γ (1-gamma) technology node using extreme ultraviolet (EUV) in calendar 2025.”

• Management noted also being ahead of plan with HBM shipments and, in turn, achieving a “more than a sequential doubling of HBM revenue,” with data center sales up 400% Y/Y and 40% Q/Q during the quarter. Management noted that “greater than 50% of our revenue now comes from data center” and that one data center customer accounts for 13% of total sales.

• Management also increased its forecast for the HBM TAM to $30B by CY2025, up from its previous estimate for $25B.

A big part of why MU is expected to do well in terms of HBM share gain is the company’s customer base with MU recently starting to ship to Nvidia (NVDA) B200/GB200 platforms. The company also “announced two additional high-volume customers.” While we understand MU won’t be the industry single source supplier of HBM, we do think it will make a substantial +20% percent of the HBM market by 1H26.

MU stock valuation & Word on Wall Street

MU is also relatively cheap at current levels. The stock trades a forward PE OF 10.83 and EV/Sales C2024 of 4.15, lower than the semi peer group average of 28.2x and 7.2x, respectively. The company is also cheap for a name with AI growth exposure; other semi-guys with AI tailwinds trade at premium multiples. For example, Monolithic Power System trades at a forward PE of 37.01x and an EV/Sales of 13.54x, or Advanced Micro Devices (AMD) trades at 26.54x and 8.01x, respectively.

Wall Street continues to be bullish on MU, but the sentiment is slightly more mixed than when we last covered MU in late September. Of the 39 analysts covering the stock, 33 are buy-rated, five are hold-rated, and one is sell-rated. Sell-side price targets on the stock look more attractive after the stock pulled back on Thursday. With the stock currently trading at $87 per share, its median and mean of $130 and $133, respectively, make for an upside potential of 50% to 53%. The following chart indicates MU stock’s sell-side ratings and price targets.

What to do with Micron stock?

We think MU is attractive at current levels of two factors. The first is the fact that slow PC and smartphone demand rebound got priced into the 2QFY25 outlook and stock price, with MU down from $108.26 on Monday to $87.22 a day after earnings on Thursday of the same week. We think this presents an attractive window to jump into the stock at current levels. The second factor is its HBM growth catalyst, with the company grabbing share amid high AI-led demand for HBM. We also see green shoots for the PC TAM expansion in 2025 and expect that the AI PC moment will drive that expansion. We think this will also positively impact MU’s DRAM sales, which account for the bulk of total revenue. We think the worst has happened, and the market is digesting it, and now we expect within one to two quarters we’ll see that HBM benefit show up and push the stock price higher.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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