Micron’s results may reveal an AI winner trading at a discount

(Bloomberg) — Micron Technology Inc . will likely become the latest chipmaker to reassure investors that demand for AI-related equipment is still strong. Like many peers, he can also admit that other core areas of demand, such as PCs and smartphones, remain stagnant.

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

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

“Micron was the victim of high expectations last quarter, but the stock has fallen quite a bit since then, meaning it could be a beneficiary of low expectations so far,” said Christian Fromhertz, chief executive of Tribeca Trade Group. “He’ll have to say something positive to overcome his 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, back above $100, possibly toward its 200-day moving average above $105. However, a break below recent support near $86 would be a bearish signal, he said.

There are signs of growing optimism around Micron in the options market. Micron’s put to call open interest ratio is half of what it was a year ago. Short-term bullish positions, particularly bearish, 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 next month hasten a rotation away from tech 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. Although he has a buy rating — as do more than 90 percent of analysts overall — analyst Christopher Danely noted the weakness in near-term sentiment.

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“Based on a lot of conversations with investors this week, it looked like about 80% were bearish on Micron, with every hedge fund we talked to bearish, but a few mutual funds bullish.”

The long-term picture suggests room for optimism. Based on analysts’ average price target, Micron is seen rising more than 50 percent over the next 12 months, by far the highest projected 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’s semiconductor index by that measure. Nvidia, on the other hand, is trading at over 32. ARM Holdings Plc tops the scale at nearly 80.

Catalyst sector

However, 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. – continues to recover from a crisis last year. Broadcom’s results also showed weakness in non-AI businesses. Additionally, Micron has faced challenges ramping up production of its new memory chips.

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

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

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

“The worst is behind him 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 elevate the entire AI space. It’s something the market is thirsty for.”

Technical 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 level since June. The index is down more than 45% from a recent peak. Apple shares are up 18% this year.

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Earnings due Wednesday

–With assistance from David Marino and Subrat Patnaik.

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