Micron’s profitability might take another year despite AI chip frenzy — and the stock is suffering

The SOX chip index closed up 1.8% Thursday, while Micron shares fell more than 6% to an intraday low of $63.83 on Thursday, finishing the session down 4.4% at $65.20.

Meanwhile, the S&P 500 index
SPX
closed up 0.6% and the tech-heavy Nasdaq Composite
COMP
gained 0.8%.

Following Micron’s earnings report late Wednesday, BofA analyst Vivek Arya said the earliest he expects Micron to start breaking even on a per-share basis is a year from now.

“There is excitement around data center and AI, but too small to matter for Micron in the near/ medium-term and insufficient to offset sluggish phone/PC sales as well as Micron’s late start in the high-bandwidth memory (HBM) market,” Arya said.

Arya has a neutral rating and a $70 price target on the stock.

Read: Micron sees nine-figure data-center sales in 2024, but another quarter of negative margins

Back in July, Micron and Nvidia Corp.
NVDA,
+1.46%
announced that Nvidia was using Micron’s HBM3 Gen2 DRAM chips in its AI data-center products. Amid the current AI frenzy, there’s been increased demand for hardware that can fuel data centers capable of handling the enormous amounts of throughput required by AI models.

Wolfe Research analyst Chris Caso, with an outperform rating and a $80 price target, said that while Micron’s results and forecast showed some steps forward, “more progress is required to drive profitability, and we do feel that profitability is required for MU to break out of its trading range.”

Caso said that “becomes increasingly likely” as Micron rolls out data-center and PC memory products next year.

Micron’s profitability forecast was a big factor following Wednesday’s report as analysts invariably called out Micron’s gross-margin forecast for the fiscal first quarter.

Read: Intel’s stock slides to become Dow’s worst as inventory ‘air pocket’ overshadows AI chip rollouts

Though Micron’s negative gross margins weren’t as extreme during the latest quarter as they’ve been in the recent past, Micron still expects negative margins for a fourth consecutive quarter, amounting to a loss between 6% and 2%. Chief Financial Officer Mark Murphy said the forecast assumes no additional inventory write-downs because of memory-chip pricing.

However, Citi Research analyst Christopher Danely, who set a buy rating and a $85 price target on the stock, said the memory-chip cycle matters more right now than the pace of Micron’s margin recovery.

“Micron’s gross margins are lower than expected due to weaker mix, lower utilization, and cutting deals to lower inventory,” Danely said in a note. “However, we believe these margin headwinds will go away as the upturn takes hold.”

Read: AI will accelerate Micron’s recovery, analyst says

The Citi analyst said the DRAM upturn has already started as spot prices have increased and contract pricing is expected to follow suit. Micron specializes in making DRAM and NAND memory chips. DRAM, or dynamic random access memory, is the type of memory commonly used in PCs and data-center servers, while NAND chips are the flash memory chips used in smaller devices like smartphones and USB drives.

TD Cowen analyst Krish Sankar, who set an outperform rating and a $78 price target, said memory-chip demand should exceed supply next year if macroeconomic conditions hold.

“A structural decline in wafer starts as Micron shifts its lagging-edge equipment capacity to leading edge; and as Samsung
005930,
-0.29%
cuts output, it implies DRAM/NAND undersupply in [calendar 2024] is the most likely scenario, in our view,” Sankar wrote.

Of the 38 analysts who cover Micron, 29 have buy-grade ratings, seven have hold ratings, and two have sell ratings, along with a $81.48 price target, according to FactSet data.

Micron shares are up 30.5% year to date, compared with a 35.1% gain by the SOX chip index, a 12% rise by the S&P 500, and a 26.1% gain for the Nasdaq.