Morgan Stanley: Micron's (MU.US) "upcycle" is expected to be more sustained; reiterates "Overweight" rating and maintains $1,200 price target.

Morgan Stanley released a new research report noting that Micron Technology, Inc. (MU.US)'s latest quarterly results were broadly in line with prior expectations. Although the pace of sequential improvement slowed, the strong resilience of the business remains evident. More importantly, the company extended its qualitative supply-demand guidance through 2028 and expects memory supply-demand conditions to be tighter in 2027 and 2028 than this year. The bank believes this signal may not be fully priced in by investors in the short term, but it aligns with its view that AI demand intensity will reshape the memory industry. Morgan Stanley reiterates its "Overweight" rating on Micron with a price target of $1,200. The report shows that over the past three quarters, Micron's earnings per share consistently beat and guided above market consensus by 20% to 40%; this quarter, it beat by only 5%, and next quarter's guidance is 6% above market expectations. Morgan Stanley believes that as Micron's business visibility improves and more memory chips are locked into long-term agreements (LTAs), this may become the new normal. However, the bank also cautions that while the market has already digested the narrowing magnitude of short-term upward revisions, the signal of a prolonged upcycle remains clear. Morgan Stanley adjusted its earnings forecasts accordingly: next quarter's revenue, gross margin, and EPS are $61.516 billion, 86.3%, and $38.02, respectively; February quarter revenue, gross margin, and EPS were raised from $62.825 billion, 88.9%, and $39.39 to $67.044 billion, 87.5%, and $42.88; fiscal 2027 revenue, gross margin, and EPS were raised from $266.867 billion, 89.3%, and $168.52 to $281.047 billion, 87.5%, and $182.52. The bank's fiscal 2028 EPS forecast is $225.09, and fiscal 2029 is $134.46. Based on Morgan Stanley's latest forecasts, by the end of 2028, Micron's cumulative earnings will approach half of its current market capitalization, with the majority returned to shareholders. Guidance Extended to 2028, Customer Anxiety Highlights DRAM Scarcity Micron extended its qualitative guidance to 2028 this time and expects memory supply-demand to be tighter in 2027 and 2028 than this year. Morgan Stanley notes that the market debate has shifted from "how good can results get" to "how long can the boom last," and Micron is proving that its business visibility is extending further into the future. The company signed 10 new strategic customer agreements (SCAs), some with terms extending beyond 2030, and even a few covering through 2031. The bank believes this reflects customers' anxiety about securing DRAM supply for the next five years. Management's willingness to use the new language of tighter supply-demand in 2028 on the earnings call further reinforces the signal of cycle durability. Morgan Stanley views HBM repricing as an important upcoming catalyst for Micron. The report notes that Micron's "cloud memory" business unit accounts for about one-third of revenue but has the lowest gross margin among the company's reported segments at only 83%, because the relevant HBM contracts were signed when overall DRAM prices were far below current levels. Morgan Stanley estimates that for this segment's gross margin to match the 90% level of mobile and core data center businesses, it would require incremental revenue at 100% marginal gross margin, corresponding to a quarterly EPS boost of about $9a considerable earnings DRIVE that could materialize quickly. However, Micron did not specify how much the gross margin gap will narrow. The bank believes that if the gap persists significantly, Micron will lack incentive to continue producing HBM products. HBM repricing and buyback authorization remain key catalysts yet to be realized. On the supply side, Micron believes bit growth will slow despite increased capital expenditure. Morgan Stanley does not fully agree. The bank has been expecting next year's bit shipments to accelerate, as the three major DRAM suppliers and ChangXin Memory Technologies will all have significant wafer increases. Morgan Stanley estimates that industry-wide wafer capacity will grow 20% year-over-year next year, versus only 11% this year. The bank notes that this means next year's increase in HBM product mix and trade conversion ratios will fully offset the incremental gains from process node advancements, whereas this year the situation was the opposite. Meanwhile, Rubin's HBM content is flat versus Blackwell Ultra, and if specifications are further reduced, it could even decline. Combined with NVIDIA Corporation (NVDA.US)'s overall shipments likely being flat year-over-year in 2027, supply constraints will largely be borne by trade conversion ratios. On valuation, Morgan Stanley maintains its "Overweight" rating and $1,200 price target on Micron, corresponding to 30x cyclical earnings of $40. The bank's bull case target is $1,650, corresponding to 33x cyclical earnings of $50; the bear case is $675, corresponding to 27x cyclical earnings of $25. Morgan Stanley adds that the negative re-rating of the stock price in July at least partially reflected market concerns that the growth slope must inevitably slow, due to reasons including: a trillion-dollar memory market is unlikely to sustain the same pace of price increases long term; long-term agreements provide a price floor but also bring a price ceiling; and the AI industry is out of necessity doing more with less, including supply-related spec reductions and technological innovation. Morgan Stanley is not surprised by this and had anticipated it, but some optimistic-case earnings forecasts have been revised down. The bank states that the $300 earnings forecastthe most optimistic expectation heard a few months agonow looks unlikely to materialize, but this does not mean the cycle is over. Morgan Stanley's current calendar 2027 earnings forecast is $200, which it considers conservative and sustainable.