Damo: Micron (MU.US)'s “high boom” is expected to last longer, reaffirming the “increase” rating and maintaining the target price of $1,200
The Zhitong Finance App learned that Morgan Stanley released the latest research report indicating that Micron Technology (MU.US)'s results for the latest quarter were basically in line with previous expectations. Although the month-on-month improvement has slowed, the strong resilience of the business is still prominent. More importantly, the company extended its qualitative supply and demand guidance to 2028, and expects the 2027 and 2028 memory supply and demand relationships to be more tense than this year. The bank believes that this signal may not be fully priced by investors in the short term, but it is consistent with its judgment that the intensity of AI demand will reshape the memory industry. Morgan Stanley maintains Micron's “Overweight” rating, with a target price of $1,200.
The report shows that in the past three quarters, Micron's earnings per share continued to exceed the market consensus by 20% to 40%; however, the current quarter only exceeded expectations by 5%, and the next quarter's guidance was 6% higher than market expectations. Morgan Stanley believes that as the predictability of Micron's business increases and more memory chips are locked in long-term supply agreements (LTAs), this may become the new normal. However, the bank also warned that the market has absorbed the narrowing of the short-term increase, but the signs that the economy continues to prolong are still clear.
Morgan Stanley adjusted earnings forecasts accordingly: revenue, gross margin, and earnings per share for the next quarter were US$61,516 billion, 86.3%, and US$38.02, respectively; revenue, gross margin, and earnings per share for the February quarter were raised from US$62,825 million, 88.9%, and US$39.39 to US$67.044 billion, 87.5%, and US$42.88; revenue, gross margin and earnings per share for fiscal year 2027 were raised from US$266.867 billion, 89.3%, and US$168.52 to US$281.047 billion, 87.5%, $182.52. The bank's earnings per share forecast for the 2028 fiscal year is $225.09 and the 2029 fiscal year is $134.46.
Massage Stanley's latest forecast is that by the end of 2028, Micron's cumulative profit will be close to half of the current market value, most of which will be returned to shareholders.
Guidelines extended to 2028, customer anxiety highlights DRAM scarcity
Micron has now extended its qualitative guidance to 2028, and expects memory supply and demand in 2027 and 2028 to be tighter than this year. Morgan Stanley pointed out that in the past period, market debates have been shifting from “how good the performance can be achieved” to “how long the boom can last,” and Micron is proving that its business visibility continues to expand in the long term. The company has signed 10 new strategic customer agreements (SCA), some of which have been extended beyond 2030, and some even cover 2031. The bank believes this reflects customer anxiety about securing DRAM supply for the next five years. Management's willingness to use the new statement that supply and demand will be tighter in 2028 during the conference call also further strengthened the signal of cycle durability.
Morgan Stanley sees HBM repricing as an important catalyst after Micron. According to the report, Micron's “cloud memory” business division accounts for about one-third of revenue, yet it has the lowest gross margin in the company's reporting segment, at only 83%. The reason is that the overall DRAM price was far below the current level when the relevant HBM contract was signed. Morgan Stanley estimates that if the department's gross margin is to match 90% of the mobile and core data center business, and it needs to add 100% additional marginal gross profit in incremental revenue, the corresponding earnings per share can increase by about 9 US dollars in a single quarter. This is a very impressive performance driver, and the speed of cash out is likely to be very fast.
However, Micron did not clearly state how much the gross margin gap would narrow. The bank believes that if the gap continues to be significant, Micron will lack the incentive to continue to produce HBM products. HBM's repricing and buyback authorizations remain key catalysts that have yet to be fulfilled.
On the supply side, Micron believes that bitwise growth will slow despite the increase in capital expenditure. Morgan Stanley doesn't fully agree with this. The bank has been expecting bit-element shipments to accelerate next year, as the three major DRAM vendors and Changxin Storage will all have significant wafer increases. Morgan Stanley estimates that industry-level wafer production capacity will increase 20% year over year next year, compared to only 11% this year.
The bank pointed out that this means that the increase in the share of HBM products and the transaction conversion ratio next year will completely offset the increase brought about by process iterations, and the opposite is true this year. At the same time, Rubin's HBM content is at the same level as Blackwell Ultra. If the specifications are further lowered, it may even decline. Combined with the overall shipment volume of Nvidia (NVDA.US) in 2027, the overall shipment volume of Nvidia (NVDA.US) is likely to remain flat year on year, and supply constraints will largely be borne by the transaction conversion ratio.
At the valuation level, Morgan Stanley maintains Micron's “plus” rating and a target price of $1,200, which corresponds to a 30-fold cycle of profit of $40. The target price for the bull market scenario given by the bank is 1,650 US dollars, which corresponds to a profit of 50 dollars for a 33 times cycle; the bear market scenario is 675 dollars, which corresponds to a profit of 25 dollars for a 27 times cycle.
Morgan Stanley added that the negative revaluation of the stock price in July reflected at least part of market concerns that the growth slope would slow. The reasons include: it is difficult for the trillion-dollar memory market to maintain the same price increase rate for a long time; long-term agreements provide lower price limits, but also bring price caps; and the AI industry is coping with fewer resources due to necessity, including supply-related downsizing and technological innovation.
Morgan Stanley is not surprised by this, and has had predictions for a long time, but profit forecasts under some optimistic scenarios have been lowered. The bank said the $300 profit forecast — the most optimistic one heard a few months ago — now seems unlikely to come true, but that doesn't mean the cycle is over. Morgan Stanley's current profit forecast for the 2027 calendar year is $200, and believes that this level is conservative and that the performance is sustainable.