3 Reasons Micron is a Buy on Market Weakness

Key Points

• Micron shares move lower after solid results and an outlook for normalization.
• Guidance is favorable despite uncertainty in the memory market. 
• Analysts see the stock moving higher and rate it a Moderate Buy. 

Shares of Micron NASDAQ: MU are down about 5% following the Q4 release and guidance, but this is not the time to trim positions. The stock is down on a lackluster report that points to industry normalization, a return to growth, and a record-high total addressable market for microchips. This means that Micron’s business is at or near the bottom of the correction, and the stock is poised to move higher in the mid to long term. 

Micron Moves Lower On Solid Results 

Micron’s results are not to be bragged about, with revenue falling 40% YOY, but some details suggest the bottom is near. Among them is that revenue was better than expected, revenue decline is slowing, and revenue is up sequentially on improving demand and disciplined supply. NAND memory solutions outperformed segmentally with a 19% sequential increase offset by a smaller 3% in DRAM. 

Margin is also an area of improvement that investors should take note of. The company narrowed its gross margin loss by over 200 basis points and reduced SG&A expenses. This increased the quarterly cash flow by 1000% compared to the prior quarter, with profitability back in the forecast. Based on the numbers and guidance, the company should return to growth in the following quarter, and profitability may be reached by the end of the year.

Micron Guidance Points To Normalization 

Micron’s guidance is favorable because it expects another sequential improvement in business and YOY revenue growth. The company expects to pull in at least $4.2 billion with a possible upside of $4.6 billion compared to the Marketbeat.com analyst consensus of $4.2 billion. 

The guidance is likely cautious because the company outperformed in Q4 2023 and tends to outperform consensus. If the trend of outperformance continues, we can expect Micron to continue improving sequentially through the end of the year. While the outlook for NAND market recovery is still uncertain (although it looks strong for MU in Q4), DRAM is expected to grow by 12.5%. 

Among the drivers of business in 2024 will be AI. AI requires vast amounts of memory and is getting closer to the Edge of computing. Memory chips like Micron’s will become increasingly more in demand as AI is developed and AI computing is brought out of the cloud and closer to the data source. The takeaway is that MU may be suffering now, but it is well-positioned for the long-term embedding of AI into connected devices. 

The Analysts and Institutions Buy Micron

The analysts did not issue any revisions in the first 12 hours following Micron’s Q4 release, but the trend in sentiment is telling. There were 9 revisions in September, including 7 boosted price targets and 1 upgrade. The outliers are reiterated ratings that amount to a Strong Buy with a price target about 15% above the consensus. The Marketbeat.com consensus implies a 13% upside for the market, and the range of targets set in September adds another 5% to 20%. 

Additionally, institutions are buying Micron. The Q3 activity is mixed but shows ramping purchases to offset sales, which indicates rotation. That aside, the institutions have bought Micron on balance for the last year and own about 80% of the stock. With share prices moving back into the institutional buy-zone, we can expect their purchases to increase. 

The Technical Outlook: Micron Falls To Critical Support 

Shares of Micron are down about 5% in early trading and may fall further. The caveat is that price action is above critical support near $64/$65, and may produce a rebound when reached. In this scenario, the MU market will likely move sideways at or near current levels before rallying later this year or early in 2024. If the MU market falls below critical support, it could reach the bottom of the 2023 trading range near $50 before the next rally can begin.