Morgan Stanley Lights Fire Under Western Digital and Micron With Upgrades

The chip market may not be particularly sexy, but when you consider how many microprocessors and how much memory is floating around out there in devices we use every day, it quickly becomes clear how desperately vital this market is. Two entrants in this field, Micron Technology (NASDAQ: MU) and Western Digital (NASDAQ: WDC) just got a shot in the arm from recent upgrades out of Morgan Stanley.

A Better Market than Morgan Stanley Expected

Joseph Moore, an analyst with Morgan Stanley, elaborated on just what happened to the two companies and what drove the decisions. Both Micron and Western Digital were upgraded from “equal weight” to “overweight”, which sent shares up about 2% each in premarket trading. Both companies gave back some of those gains as of this writing, but both are still well off their previous day's closing figures.

So what drove those fresh gains? Moore noted that Morgan Stanley wasn't expecting “memory fundamentals” to hit their bottom as fast as they did, but that meant some serious new potential for gains going forward. With both a higher trough in play, Moore noted, as well as improved values for semiconductor operations, the need to re-evaluate companies that produce memory shines through.

The two stocks have already seen some substantial gains so far; just in the last three months, Micron has added almost a third to its total value—leaving aside whatever gains it makes today—and Western Digital has gained nearly a fifth, at 19%. Looking at the broader year figures, Western Digital stock has nearly doubled in value—it's up 90% for the year, reports note—while Micron has jumped only a little lower at 77% gain.

It's the Type of Chip That Counts

Moore also noted that there seems to be accelerated demand for memory in general, which means a tighter market is coming up and more inventory is being produced to help absorb that likely increased demand. All of this combined prompted Moore to hike price targets for each company, with Micron going from $56 to $73, and Western Digital going from $64 to $88.

While both companies are seeing some substantial increases, possibly as a result of that gaining demand, there's also a difference in the chips the companies produce that will make a difference. Micron's specialty is DRAM chips, which will see a little less demand, but still enough to hike price targets. Meanwhile, Western Digital's NAND chips will go through a sudden jump back upward, or so Moore figures.

Plenty of Reason to Demand More Memory

Looking at the broader market, meanwhile, reveals at least some reason behind the gains. Remember that Moore consulted some channel partners to get a better look at the likely market for memory going forward, and some of those channel partners likely gave him an earful.

First, we're about to have several new smartphones coming out this year. Remember that this is at least the start of the 5G market going live, which will prompt even some currently-satisfied customers to make an upgrade whether they planned to or not. Getting in on even the start-up 5G—which may not be the powerhouse earlier projected—will appeal to plenty of users out there.

Second, we're also looking at the start of a new console generation coming out on the video game front. With Xbox Series X units probably already under construction, as well as PlayStation 5 units, that's going to ramp up demand for chips that will make their way into the new systems that will likely be hot buys for the holiday 2020 shopping season.

Put these two together, and add in the typical demand for memory that comes from laptops, desktops, tablets, and non-5G smartphones—not to mention smart home technologies—and it spells a huge hike in memory demand.

Naturally, these are all gray areas. No one knows how many Xbox Series X units or new 5G-capable iPhones will be sold, especially given that these are first-generation items. Some will likely wait for more reliable, patched units that address any shortcomings, while others clutch their wallets close and wait for their savings to mesh up with their technological demand. The early adopters, however, will fuel demand going forward, and make demand for chips substantial through much of 2020 and likely into 2021 as well.

So as 2020 goes forward, remember your chip makers, and maybe slip a little of their stock in your portfolio. Morgan Stanley's already remembering them.