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Micron Stock Tumbles on Morgan Stanley Downgrade, Memory Chip Sector Warning

Morgan Stanley's Joseph Moore cut his Micron price target to $75 a share and lowered his rating on the chipmaker to 'equal-weight.'

Micron Technology  (MU) - Get Free Report shares slumped lower Thursday after analysts at Morgan Stanley cut their rating on the group amid a warning that 'winter is coming' for the global memory chip sector.

Morgan Stanley analyst Joseph Moore lowered his rating on the stock by one notch, to 'equal-weight', while slashing his price target by $30 to $75 a share, as the bank noted "a challenging backdrop for forward returns” for Micron as "DRAM conditions lose steam" in its shift from mid to late cycle. Morgan Stanley also cut its rating on South Korean chipmakers SK Hynix.

"While pricing is still moving higher, the rate of change is approaching peak as supply is catching up to demand," the bank said. "Our cycle indicator has shifted out of 'mid-cycle' to 'late-cycle' for the first time since 2019 and this phase-change has historically meant a challenging backdrop for forward returns."

Micron shares were marked 6.1% lower in early trading Thursday to change hands at $70.50 each, a move that would nudge the stock into negative territory for the year. 

"While demand has stayed strong on a relative basis, it has worsened in recent weeks which has led to a downtick in pricing expectations," Morgan Stanley said. "Initial indications are pointing to a more challenging environment for pricing into 4Q following prolonged 3Q negotiations that resulted in continued price hikes, and a reversal in trend into 2022."

"What this means in practice is that the investment case for memory will migrate from "what is the earnings potential?" toward "why should I own DRAM at this late stage, and what price is fair?," the note added.  

Last month, Micron forecast $8.2 billion in sales and earnings in the region of $2.30 per share, but noted that COVID-related costs would rise and capex would likely increase to around $13 billion in the coming fiscal year as the group invests in new products, including the next generation DDR5 DRAM chip, while meeting consistently increasing customer demand.

The outlook clouded an otherwise solid third quarter earnings report that included a Street-beating bottom line of $1.88 per share and a 36% surge in revenues to $7.24 billion.

"When you look at all the acceleration of the digital transformation and the surge in demand that has occurred, and on top of it, impose semiconductor industry shortages that are leaving a lot of the unmet demand across multiple industries here," CEO Sanjay Mehrotra told investors on a conference call. 

"All of that is really leading the customer ecosystem as well as us, the suppliers, to really absolutely prepare for supply chain so that we can meet the demand," he added.