Micron Technology stock has stuttered, but Wall Street analysts think it will surge higher when the market understands just how bad the memory-chip shortage really is.
In early trading, shares were down 0.5% at $857. The stock is down 12% over the past month and well short of its late June peak of more than $1,200 on worries about how to sustain sky-high margins in a cyclical business.
Arguably very little has changed about Micron's fundamentals because memory prices keep rising. Wall Street still expects earnings to increase for the next three years at least despite higher artificial-intelligence spending. The stock now trades at a forward price-to-earnings ratio of less than six times, according to FactSet.
Mizuho analyst Vijay Rakesh sees the current slump as an opportunity. He reiterated an Outperform rating on the stock with a $1,375 target price this week after meeting with Micron executives.
"We believe Micron sees DRAM/NAND [memory chips] market tight well through 2027E, with any incremental real supply only coming in 2028E and still no meaningful change to supply-demand imbalance," Rakesh wrote in a research note.
Rakesh values Micron at a price-to-book ratio of 5.3 times his forecast for the company's book value in 2027. It currently trades at a forward price-to-book ratio of 3.4 times, according to FactSet.
Investors could become more confident if the company can sustain more than 80% gross margins. Rakesh argues that is possible with its new long-term supply agreements, which have a premium for future products.
There is an open question about rising supply, especially from Chinese memory-chip companies such as ChangXin Memory Technologies ( CXMT). While they are limited in their ability to supply U.S. companies and more advanced forms of hardware, Apple has lobbied to be allowed to buy from CXMT because of the shortage, news outlets have reported.
Rakesh argued that Chinese worries are "overblown" and should dissipate as it becomes clear that CXMT will focus on domestic Chinese supply and has limited capacity to move into high-bandwidth memory.