Morgan Stanley: Micron (MU.US) "High Prosperity" Expected to Last Longer, Reiterates "Overweight" Rating and Maintains $1200 Target Price

According to the latest research report released by Zhihu Finance APP, Morgan Stanley points out that Micron Technology's (MU.US) latest quarterly results are largely in line with previous expectations. Although the quarter-on-quarter improvement has slowed somewhat, the strong resilience of its business remains evident. More critically, the company has extended its qualitative supply and demand guidance out to 2028, and expects the supply and demand dynamics for memory in 2027 and 2028 to be tighter than this year. Morgan Stanley believes this signal may not be fully priced in by investors in the short term, but it aligns with their view that AI demand strength will reshape the memory industry. Morgan Stanley maintains its “Overweight” rating on Micron, with a target price of $1200.

The report indicates that over the past three quarters, Micron's earnings per share consistently surpassed and guided 20% to 40% above market consensus; this quarter only exceeded expectations by 5%, and next quarter’s guidance is 6% higher than the market’s forecast. Morgan Stanley believes with increasing business visibility and more memory chips locked in long-term agreements (LTA), this may become the new norm. However, the bank also reminds that the market has already digested a narrowing of near-term upward revision, but the signals of prolonged prosperity remain clear.

Morgan Stanley has accordingly adjusted its earnings forecasts: Next quarter’s revenue, gross margin, and EPS are $61.516 billion, 86.3%, and $38.02, respectively; for the February quarter, revenue, gross margin, and EPS are raised from $62.825 billion, 88.9%, $39.39 to $67.044 billion, 87.5%, $42.88; for fiscal year 2027, revenue, gross margin, and EPS are increased from $266.867 billion, 89.3%, $168.52 to $281.047 billion, 87.5%, $182.52. The bank forecasts EPS of $225.09 for fiscal 2028 and $134.46 for fiscal 2029.

According to Morgan Stanley’s latest forecast, by the end of 2028, Micron’s cumulative profit will be close to half its current market value, most of which will be returned to shareholders.

Guidance Extended to 2028, Customer Anxiety Highlights DRAM Scarcity

Micron has extended its qualitative guidance to 2028, and expects supply-demand for memory in 2027 and 2028 to be tighter than this year. Morgan Stanley notes that recently the market’s debate has shifted from “how good can results get” to “how long can the boom last,” and Micron is demonstrating that its business visibility is increasing over the longer term. The company has signed 10 new strategic customer agreements (SCA), with some contracts extending beyond 2030 and even some to 2031. The bank believes this reflects customer anxiety about ensuring DRAM supply over the next five years. Management’s willingness to use the terminology of tighter supply and demand in 2028 on the call further reinforces signals of the cycle’s durability.

Morgan Stanley sees HBM repricing as an important catalyst for Micron going forward. The report points out that Micron’s “Cloud Memory” business contributes about one-third of revenues, but it’s the lowest-margin division at only 83%, mainly because, when those HBM contracts were signed, overall DRAM prices were much lower than current levels. Morgan Stanley calculates that if this division’s margin is to reach the 90% level of Mobile and Core Data Center divisions, it would require incremental revenue at 100% incremental margin, which could increase quarterly EPS by about $9—this is a significant performance driver, with potential for rapid realization.

However, Micron has not clarified how much the gross margin gap will narrow. The bank believes if the gap remains significant, Micron will lack motivation to continue producing HBM products. HBM repricing and buyback authorization remain key catalysts yet to be realized.

On the supply side, Micron believes that despite increased capex, bit growth will continue to slow. Morgan Stanley does not fully agree. The bank has always anticipated that bit shipments will accelerate next year because 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% YoY next year, compared to just 11% this year.

The bank points out that this means next year’s HBM mix increase and transaction conversion ratio will entirely offset the incremental benefit from process iteration, whereas this year was just the opposite. At the same time, Rubin’s HBM content is on par with Blackwell Ultra; if specs are further reduced, it may even decline further. Coupled with the likelihood that Nvidia’s (NVDA.US) total shipments in 2027 will be flat YoY, supply constraints will largely be absorbed by the transaction conversion ratio.

In terms of valuation, Morgan Stanley maintains its “Overweight” rating on Micron and $1200 target price, which implies 30x cyclical earnings of $40. The bank’s bull-case target price is $1650, based on 33x cyclical earnings of $50; the bear-case is $675, with 27x cyclical earnings of $25.

Morgan Stanley adds that the negative re-rating in shares seen in July at least partially reflected market concerns that growth slope would inevitably slow, for reasons including: it’s difficult for a trillion-dollar memory market to sustain the same pace of price increases over the long term; LTAs provide price floors but also price ceilings; the AI sector is necessarily making do with fewer resources, including supply-related spec reductions and technological innovation.

Morgan Stanley is not surprised by this, having anticipated it, but some profit estimates under optimistic scenarios have been revised down. The bank states that a $300 earnings estimate—the most optimistic projections heard a few months ago—now seems unlikely, but this does not mean the cycle is over. Morgan Stanley currently forecasts $200 in earnings for calendar 2027, believes this level is conservative, and that performance is sustainable.