Morgan Stanley lists 3 reasons this memory stock 'can continue to work'

Morgan Stanley maintains an "equal weight" rating on Micron Technology, citing near-term optimism driven by increasing AI-related revenue, particularly from HBM, projected to nearly double by fiscal year-end 2025 and contribute to a 30% increase in blended pricing. Easing margin pressures from improved enterprise SSD volumes and rising DDR4 pricing are also expected to boost earnings, with gross margins potentially improving from 37.0% in the May quarter to 43.9% in the August quarter. While valuation is not considered cheap, it remains below historical peaks, and Morgan Stanley forecasts August quarter revenue of $10.32 billion and EPS of $2.47, above consensus estimates, though risks including inventory build-ups and demand weakness remain.

Analysis

Morgan Stanley presents a constructive near-term outlook for Micron Technology (MU) ahead of its June 25 earnings, despite maintaining an "equal weight" rating. The optimism is anchored on three key catalysts. First, Micron's exposure to the AI market is rapidly expanding, with AI-related revenue projected to nearly double by fiscal year-end 2025 and shift from 14% to nearly 30% of total sales by November. High-Bandwidth Memory (HBM) is a critical component of this, with sales forecast to reach $2 billion in the August quarter and contribute to a 30% increase in blended pricing. The gross margins of competitor SK Hynix, approaching 60% with a similar HBM mix, suggest significant margin upside potential for Micron. Second, margin pressures are expected to abate as a higher consumer mix and NAND underutilization issues from the May quarter resolve, supported by improved enterprise SSD volumes and a 150% year-over-year increase in spot DDR4 pricing. Consequently, Morgan Stanley forecasts Micron's gross margin to reach 43.9% in the August quarter, substantially above the consensus estimate of 39.5%. Third, while the stock's valuation at approximately 3x price-to-book is not considered cheap, it remains below its 2023 peak of nearly 4x. This is reflected in Morgan Stanley's August quarter forecasts for revenue ($10.32B) and EPS ($2.47), which are significantly above Street estimates of $9.89B and $2.02, respectively. However, a notable contradiction exists as the firm's base-case price target of $98 is considerably below the stock's current price, signaling a potential disconnect between the near-term tactical opportunity and long-term valuation.

Key Decisions for Investors

• Given Morgan Stanley's above-consensus forecasts for revenue, EPS, and gross margins, investors should monitor Micron's June 25th earnings report for a potential positive surprise driven by AI demand and margin recovery.
• Despite the bullish near-term fundamental drivers, the "equal weight" rating and a $98 price target—well below the current trading price—warrant caution regarding the stock's valuation and long-term risk/reward profile.
• Key metrics to scrutinize in the upcoming earnings release are HBM sales figures, gross margin performance relative to the 43.9% forecast, and management's guidance on inventory levels and capital spending to validate the positive thesis.