Morgan Stanley released its latest research note pointing out that Micron Technology (MU.US) reported quarterly results that were broadly in line with prior expectations, and while the pace of sequential improvement slowed somewhat, 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 relationships in 2027 and 2028 to be tighter 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 maintains its "Overweight" rating on Micron Technology (MU.US) with a price target of $1,200.

The report shows that over the past three quarters, Micron Technology (MU.US) consistently beat earnings per share estimates and guided 20% to 40% above market consensus; this quarter it beat by only 5%, and next quarter's guidance came in 6% above market expectations. Morgan Stanley believes that as Micron Technology (MU.US) achieves greater business predictability and more memory chips are locked into long-term agreements (LTAs), this may become the new normal.

However, the bank also cautions that the market has already digested the narrowing magnitude of short-term upward revisions, but the signal of a prolonged upcycle remains clear. Morgan Stanley accordingly adjusted its earnings forecasts: next quarter 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 EPS forecast is $134.46.

Based on Morgan Stanley's latest projections, by the end of 2028, Micron Technology (MU.US) cumulative earnings will approach half of its current market capitalization, with most of that being returned to shareholders.

Guidance Extended to 2028, DRAM Scarcity Highlighted by Customer Anxiety

Micron Technology (MU.US) extended its qualitative guidance to 2028 and expects memory supply-demand to be tighter in 2027 and 2028 than this year. Morgan Stanley notes that market debate has shifted from "how good can results get" to "how long can the boom last," and Micron Technology (MU.US) 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 customer anxiety about securing DRAM supply for the next five years. Management's willingness to use new language on the earnings call about tighter supply-demand in 2028 further reinforces the signal of cycle durability.

Morgan Stanley views HBM repricing as an important subsequent catalyst for Micron Technology (MU.US). The report notes that Micron Technology (MU.US) "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 calculates that for this segment's gross margin to match the 90% level of the mobile and core data center businesses, it would need incremental revenue with 100% marginal gross margin, corresponding to a quarterly EPS boost of about $9, which is a considerable earnings driver and could materialize quickly. However, Micron Technology (MU.US) did not specify how much the gross margin gap would narrow. The bank believes that if the gap remains significantly wide, Micron Technology (MU.US) would lack incentive to continue producing HBM products. HBM repricing and buyback authorization remain key catalysts not yet realized.

On the supply side, Micron Technology (MU.US) believes bit growth will slow despite increased capital expenditure. Morgan Stanley does not fully agree. The bank has consistently expected bit shipments to accelerate next year, as all three major DRAM suppliers and ChangXin Memory Technologies will have significant wafer additions. Morgan Stanley estimates industry-wide wafer capacity will grow 20% year-over-year next year, compared to only 11% this year.

The bank points out that this means next year's increased HBM product mix and trade conversion ratios will fully offset the incremental gains from process iteration, while this year the situation was exactly 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 (NVDA.US) total 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 on Micron Technology (MU.US) and $1,200 price target, corresponding to 30 times cyclical earnings of $40. The bank's bull case price target is $1,650, corresponding to 33 times cyclical earnings of $50; bear case is $675, corresponding to 27 times cyclical earnings of $25.

Morgan Stanley adds that the negative re-rating of the stock in July at least partially reflected market concerns that the growth slope must inevitably slow, including: a trillion-dollar memory market cannot sustain the same pace of price increases long-term; long-term agreements provide a price floor but also bring a price ceiling; the AI industry is out of necessity getting by with fewer resources, including supply-related spec reductions and technological innovation. Morgan Stanley is not surprised by this and had anticipated it, but some optimistic-scenario earnings forecasts were revised down.

The bank states that the $300 earnings forecast — the most optimistic expectation heard a few months ago — now looks unlikely to materialize, but this does not mean the cycle is over. Morgan Stanley currently forecasts calendar 2027 earnings of $200 and believes this level is conservative and that results are sustainable.