Will Surging Demand For High-Bandwidth Memory Help Micron Stock?

Micron Technology (NASDAQ: MU) stock has done relatively well this year, rising by 26% since early January. The optimism stems from a couple of factors. Firstly, while the memory markets remain oversupplied leading to a collapse in prices for both DRAM and NAND memory since late 2021, there is optimism that things could recover over the second half of 2023.  Major memory manufacturers including Samsung, SK Hynix, Micron, Western Digital, and Kioxia pared back on investments and also reduced production, in a move that could help to stem the decline in DRAM and NAND prices. Demand for PCs and smartphones could also be bottoming out after a post-Covid-19 lull, helping to revive memory demand to an extent. For perspective, while PC sales declined by about 30% year-over-year in Q1 CY’2023, per Gartner, the pace of the decline slowed to about 17% in Q2, and there is optimism that demand could pick up a bit going forward as excess inventories are absorbed. Micron’s recent earnings have also been a bit better than expected. While the company has seen sharp declines in revenue, with sales declining by 56.6% over Q3 FY’23, the most recently reported quarter, with losses coming in at -$1.43 per share, both metrics beat estimates.

Interestingly, MU stock had a Sharpe Ratio of 0.5 since early 2017, which is below the 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Moreover, the advent of generative AI tools such as the popular ChatGPT is also likely to drive up memory demand since these algorithms typically require more storage and DRAM resources compared to other types of algorithms. AI required high-bandwidth memory (HBM) for training large language models and inferencing quickly, and Micron has not been typically viewed as a leader in this space. However, the company recently announced the specifications for its latest HBM3 second-generation memory which is considerably ahead of its rivals. This could help the company drive higher sales going forward.

Now Micron has also seen some headwinds. In May, the Chinese government barred the use of Micron products in key infrastructure applications in the country, citing national security risks. Micron has indicated that it expects a revenue hit to the tune of a low-single to a high-single-digit percentage. There are also concerns about the global economy, amid high-interest rates and relatively stubborn inflation, which could weigh on consumer electronics sales. That being said, we think the overall recovery in the memory markets and the potential surge in demand from the generative AI trend could help to offset this in the medium term.  We remain neutral on Micron stock with a $67 price estimate which is slightly ahead of the current market price. See our analysis of Micron’s valuation: Expensive or cheap for more details.

[1] Month-to-date and year-to-date as of 8/22/2023
[2] Cumulative total returns since the end of 2016